You may consider finding a buyer for your growing SaaS business at some point. Founders put businesses up for sale for several reasons, such as changing directions, cash runway concerns, or to make a profit and move on.
If you decide to sell your SaaS business, there are some key issues you should think about as you go through the sale process.
1. What Kind of Buyer Are You Looking For?
The flippant answer to this question is, "Whoever will pay the most money!". But the reality is a bit more complicated. Usually, the buyer willing to cut the biggest check will be a strategic acquirer. They typically purchase a business, blend it into their existing offering, and cross-sell all the products under their umbrella to their widened customer base.
However, the largest check isn't necessarily the quickest check. And if you want to conclude a sale in short order, know that strategics tend to be bureaucratic and take their time. The risk here, of course, is that the deal falls through after many months of diligence, and you're back at square one.
On the flip side, there are private equity firms that might take a shine to your SaaS business. And while they may not be the highest possible bidder, chances are they can conclude a deal much faster than a strategic buyer. Buying and selling are what they do (numerous times a year), so they're comfortable moving at a faster pace. They're also more likely to close a deal, especially if they've already done so successfully with other firms in your industry.
2. Ignore Comps
It's easy to get carried away with comps. Perhaps a large publicly traded firm is in the same line of business as you, and they're trading at an astronomical valuation. You may think you deserve to trade at a similar multiple of ARR, but don't let greed get in the way of selling when the time is right. Private markets don't have the liquidity that public ones do, and this can be especially true for lower market firms. Ultimately, your company's value is what someone will pay for it, not what you think it should be.
3. Think about Non-Financial Aspects
How much you sell the business for is important. Yet there are some non-financial considerations to think about as well:
-How will the new owners treat your team? Of course, you care about your employees, so you'll want the new owners to treat them well. So, a private equity buyer with a history of laying off staff to cut costs is probably not your best bet. On the other hand, a growth-focused private equity buyer may be happy to keep the team together and grow it.
-Are you willing to stick around for a while? As a condition of concluding a transaction, some buyers will want the founders to remain a key part of the company during the transition process and even for a few years afterward. And some of your shares may not vest until you reach certain milestones or growth targets. So it would help to decide whether you're happy to stay with the company or prefer to sell your stake and do something completely new.
-How will the brand be treated? If you've developed a compelling product, you can be forgiven if you'd rather not see it disappear after the company is sold. In the case of a private equity firm, you're probably ok on this front; they usually keep the product as is. But with a strategic, don't be surprised if your brand is ultimately blended in with the acquirer's offering--- the name and uniqueness of what your team invented vanishing along the way.
4. The biggest check size might come with conditions:
Some buyers offer big exits for founders, but a lot of the exit value is deferred or tied up based on the business's future achievements, which you may have very little control over. For example, let's say a business that gets two offers:
A. $50m; 30% on closing; 30% after one year, 30% after two years; and 10% after three years based on metrics agreed in advance.
B. $38m upfront with a 10% holdback for one year to cover any issues that might arise.
In options A, the founders get $15m upfront and will have to wait on the rest to be achieved. In Option B the founders get $34.2m on the closing of the sale.
Which option to choose depends on the founders' appetite to continue having exposure to the business. If the buyer has big plans, it might be worth leaving money in the company to get a larger amount of money over time. On the other hand, option B provides a clean break and would be a good option for those that find that most attractive.
The bottom line? Dreaming of dollar signs is fun, but if you're thinking of an exit, there's much more that you need to think about.
Are you running a growing SaaS business and looking for finance to take your business to the next level? Element Finance offers revenue-based finance and term loans with no hidden covenants. So give us a shout anytime to see if we're a match!