Selling a SaaS business in 2024 offers unique opportunities and challenges for a business owner. The SaaS market remains highly desirable for buyers due to recurring revenue models and predictable cash flows. With increasing demand for B2B SaaS and vertical software, sellers can often command impressive multiples. But to maximize business value, sellers need to prepare carefully, focusing on both their financial and operational metrics, as well as removing key risks from the business (e.g. customer concentration, technology risks, founder risk, business model risk, etc.)

1. Understanding Your Reasons for Selling

Before diving into the sale process, clarify why you want to sell. The reason can influence timing, target buyers, and overall sale strategy. Common motivations include:

• Financial Goals: You may want to cash out to invest in new ventures, more profitable saas businesses or enjoy the financial return on years of hard work.
• Market Timing: With SaaS multiples averaging 4-8x EBITDA multiple in 2024, the current market demand for recurring revenue models means SaaS businesses often attract strong offers as they increase their business value.
• Personal Goals: Reducing workload or shifting focus to new projects can also be significant factors for a business owner.

Understanding your reasons helps you set clear expectations and align with buyers who value the same aspects of your business.

2. Preparing Your SaaS Business for Sale

Preparation is crucial for getting the best value. Here’s how to ensure your SaaS business is sale-ready:

• Organize Financials: Clean, well-organized financial statements are essential. Aiming for accurate monthly revenue and expenses will help illustrate financial stability. Identify add-backs that currently exist in the business, so a potential buyer will take those into account.
• Highlight Key SaaS Metrics: SaaS buyers often prioritize metrics depending on the SaaS business model like:
  • MRR and ARR (Annual Recurring Revenue): Recurring revenue is highly attractive, with ARR values generally commanding higher multiples.
  • Net Revenue Retention (NRR) and Churn Rate: High NRR and low churn rates implies customer satisfaction and stability. Good SaaS businesses are expected to have a monthly churn rate below 5%. For enterprise level products with monthly subscriptions, the expected monthly churn rate should be below 1% or even positive (increasing revenues over time, due to upselling of new or additional features)
  • Customer Lifetime Value (LTV) and CAC: Showing that LTV/CAC ratios are over 3:1 is a good benchmark of profitability.

Make sure you have dashboards that showcase your business key metrics in an actionable way. Using tools offered by tech companies such as Baremetrics can help you on this task, as you can just connect your payment processor.

Having visibility on your key metrics and benchmarks might even show value levers that you can pull in advance before going into an exit process. Last week I spoke to a founder who had not increased prices for several years, lagging behind competitors albeit having a better product. By adjusting price and communicating this change effectively to customers, he increased revenues (and margins) by almost 15%.

• Identify your MOATs and growth levers: Highlight competitive advantages and MOATs, unique features, and market positioning. If your SaaS product serves a growing or underserved niche, document how it can scale or adapt. If your SaaS product can be used for untapped markets or industries, show that. If your product can be sold across multiple geographies, try to prove that by getting some first customers on those geographies.
• Mitigate Business Risks: a) ensure legal readiness such as IP rights, GDPR compliance, and clean terms of service are must-haves; b) remove founder risk, specially if you want to cash out, by training your team and making the business self sustainable without your presence on the day-to-day operations; c) remove concentration risk by diversifying your customer base; d) remove churn risk by migrating customer to annual or multiannual plans. 

Buyers look for secure, compliant businesses to reduce future risks. While a founder is biased towards seeing the good within their business, it’s important for founders to understand the perspective of a potential acquirer and map in advance potential weaknesses to mitigate them before starting a sale process.

3. Valuing Your SaaS Business

Valuation is a critical step, and SaaS companies are often valued based on revenue multiples. The range for a fair market value and company's valuation depends on growth, stability, and profitability:

• EBITDA Multiples: Smaller SaaS companies up to $2M valuation may see multiples around 4-7x EBITDA multiple, while larger companies could attract 7-10x EBITDA multiple, even higher if growth is high.
• Factors Influencing Valuation:
  • Growth Rate: Fast-growing SaaS companies (20-50%+ YoY) will command higher multiples and higher business value.
  • Profitability: SaaS businesses with constant new customers, strong cash flows and a solid profit margin are attractive as they have a bigger perceived value.
  • Retention and Churn: High retention or low customer churn rates signal stable revenue multiple.

For an accurate company's valuation, consider hiring a professional with SaaS expertise to validate your metrics as they could depend also on your specific SaaS business model. At Boopos, we provide accurate business valuations for SaaS founders. Get in touch with us if you are interested in knowing how much your business is worth.

4. Building a Potential Buyer List for your SaaS Company

Identifying the right buyer is key. Here are common prospective buyer types and tips for targeting them:

• Strategic Buyers: Often larger SaaS companies or corporations in the space looking to add complementary services.
• SaaS Aggregators: Companies that acquire SaaS within a specific vertical. These companies usually are very efficient in assessing business and moving forward with a potential acquisition if it fits their investment thesis.
• Private Equity and Family Office Firms: Focused on profitable, scalable SaaS products, especially those with proven growth and healthy margins.
• Individual Buyers and Investors: Solopreneurs or smaller investors interested in owner-operated SaaS businesses. Usually suitable for smaller deals.

How to Find and Approach Buyers for your SaaS business:

Having access to qualified buyers is crucial to ensure a successful sale and maximize exit multiples. Some common options for SaaS founders to source these buyers are:

• Network within SaaS and industry communities as within other businesses.
• Identify competitors or larger companies who might want to add your SaaS product to their offering business model. A strong competitor could become just the right buyer.
• Work with an M&A advisor to tap into their network and market reach. This is very recommended as many companies do not respond to cold outreach.

5. The Sales Process for SaaS Businesses

The selling process typically involves several key steps and technical aspects:

• Prepare a Confidential Information Memorandum (CIM): A CIM gives potential buyers an in-depth look at your SaaS business, including financials, customer demographics, market opportunities, and product details. A professional CIM will enhance the attractiveness of the SaaS business, increasing buyer confidence and speeding up the sales process.
• Due Diligence: Buyers will want to verify all your claims, from financials to user metrics. Expect detailed scrutiny of your Balance Sheet and P&L, as well as metrics such as CAC, LTV, churn, and customer/revenue retention rates. Due diligence process usually also includes legal, operational, and technical reviews. To keep the process organized and increase the perceived value, we recommend you to set up a data room.
• Negotiation and Deal Structure:
  • All-Cash Deals: Immediate payout but may come with a lower valuation.
  • Earn-Outs: Part of the payment is conditional on future performance, often used if the buyer wants you to stay on for a transitional period and/or to align buyer and seller incentives on deal structure (e.g. bridge valuation gap by adding an earn out linked to future company growth).
  • Seller Financing: You, the founder, provide part of the financing to the buyer, usually for a premium.

Each structure has pros and cons. Assess what aligns best with your goals and risk tolerance. Having a M&A advisor on this stage helps bridge the gap between buyer and seller, ensuring that the deal does not derail at this stage and follows up the correct due diligence process.

6. Post-Sale Considerations

After closing the deal, here are a few important steps to consider:

• Smooth Transition: Ensure a seamless handover of knowledge, contacts, and systems to the new owner. A well-planned transition helps maintain customer satisfaction and reduces disruptions. Depending on the founder's level of involvement in the SaaS business, the documentation of the existing processes, and the deal structure this period can take from a couple months to over a year.
• Tax Implications: Depending on your location, selling a SaaS business could have significant tax implications. Consult a tax advisor to minimize liabilities and maximize your post-sale gains.
• Future Opportunities: Many sellers find that selling one SaaS company opens the door to new ventures, investments, or even consulting opportunities.

Conclusion

Selling a successful SaaS business in 2024 can be incredibly rewarding, but it requires careful planning and knowledge of the SaaS market. By understanding your goals, preparing meticulously, and working with the right experts, you can maximize your busniess value and attract interested buyers more efficiently.

Boopos has worked with hundreds of founders looking to buy or sell a SaaS business, always in the tech space. If you are currently considering an exit, reach out to us to discuss how we can support you regarding the due dilligence process on your exit journey.