February 21, 2020
Selling a SaaS business (or any business for that matter) is a deeply emotional, highly complex process. It’s like climbing Mt. Everest - there are bound to be set backs and moments where you want to turn back. But don’t! There are very clear steps to selling a business, the key is avoiding the common mistakes many Founders make.
We’ve successfully worked with over 47 Founders during their journey to sell their SaaS business. We’ve learned a thing or two about the common pitfalls and setbacks a Founder may experience. We’ve narrowed it down to the 5 most frequent mistakes Founders make when selling their SaaS business. Before you set out on your own climb - take a moment to learn from people who have been there.
If you’re a SaaS business, there’s a good chance you’ve received prospecting emails from a Buyer interested in investing in your business. You likely shoved these to a folder titled “get to these later”.
Well, later should be now.
Researching your exit options should be a consistent practice. We encourage you to take these calls along the way (every 6 months is a good cadence). You’ll likely learn a lot about what Buyers value most about your business, the market dynamics as a Seller, and ultimately what your company is worth in their eyes.
For example, you might learn that you’ve spent too much time focused on growth at all costs and not nearly enough focused on creating efficient and sustainable growth; or maybe you didn’t prioritize an update to your UI only to hear from Buyers that your customer experience is behind your competitors.
Neither of these are easy to hear, but will shine a light on where you should focus before you get serious about selling.
When selling your SaaS business, the single most important thing to take into account is who is on the other side of the table. What type of partner are you working with? This sounds simple but a lot of Founders get caught up in finding the Buyer with the highest headline number, this is oftentimes a mistake (more on this later).
At first glance, all Buyers might look the same - a financial institution ready to write you a check. It’s up to you to weed through who is authentic and has your business’ best interest at heart.
A few smart ways to do this:
Every Founder has a value they want for their SaaS business. A number that makes it all worth it, grants financial independence, and helps diversify your net worth from being tied up in one asset.
Once you have a number in mind, don’t be afraid to share it early and often in your conversations. A lot of Founders want to keep this close to the vest for fear they will shoot too low when a Buyer might want to pay more.
After all, the first thing they teach you in negotiating school is he/she who speaks first loses. I can tell you right now that is not the case. As the Founder who knows your own business deeply, you are almost always going to value it higher than a Buyer. It’s your baby - of course you see immense value in it.
By sharing your target number early and often, you will:
This is often overlooked by a Founder but is a huge point of focus for a Buyer. Think about it: A Buyer wants to know “if I invest in this business, how much runway is left to grow into? Who are the impact players and how do I stack up?”. As the Founder, you should be prepared to talk about this in detail.
To calculate your TAM = (Annual Contract Value) x (# of addressable accounts).
That number is the starting point. Be prepared to dive into the deeper parts of this conversation: How much market share do you have right now? Have you done a competitive analysis to see who owns the rest? How does your product stack up against those competitors? Can you make a case for why and how you can convert these customers?
All of these questions make a case for why your business has a lot of runway left to grow (and thus a Buyer would want to own it).
The structure of the deal matters, not just the size of the headline valuation.
This is an area we frequently see Founders stumble, especially if it’s your first time transacting. The headline value is obviously where your eyes go first, but make sure you’re digging deeper there. There are two main considerations when structuring a deal - how much equity you want to sell and the timing of when you earn your liquidity.
Let’s start with equity sold.
When you sell your business, you’ll have to ask yourself “how much of my company do I want to sell?”. There are usually three scenarios when it comes to selling equity:
Now let’s talk about when you earn your liquidity.
There are two main scenarios for earning your liquidity:
Each of these deal structures comes down to how you earn your cash, when you earn your cash, and how long you want to stay in the business.
Each of these mistakes is rooted in one thing: missing the opportunity to think about the future for you and your business. When you set out to sell your SaaS business, it’s tempting to think in short term gains (everyone wants that big pay day). It’s even harder to pull your head out of the sand and ask yourself some tough questions about the future.
Take the time to understand the type of Buyer you want, what kind of deal structure works best for you, whether you want to stay in the business, and what your vision of the future looks like for you.
Interested in what other Founders have to say about this topic? Check out what one Founder had to say about his experience selling his SaaS business.