SaaS can be an outstanding business model when great software is joined together with exceptional customer service. Software licenses based around a subscription model offer a consistent recurring stream of revenue.
A good SaaS business requires some serious technical abilities (or reliable employees who have them), good marketing, and a solid understanding of what problems people need to be solved and how software could solve them.
While this is one of the more challenging online business models to get going, the upside is incredible whether looking to run it for the long-term or build up and flip for a profit in the far future.
This write-up will cover where to find SaaS businesses for sale, concepts, due diligence, valuations, and more.
Where To Buy a SaaS Business?
There are multiple options for investors looking to purchase a SaaS business. They include private sale, brokers, and marketplaces.
Here are five of the most common options for finding SaaS businesses to buy.
1. Private Sale
Many SaaS businesses that exchange hands do so through private sales. Most often this happens from a private investor or group of investors reaching out to smaller SaaS businesses to gauge if there’s any interest in a potential sale.
It can take a lot of time and outreach to uninterested parties before getting a business actually interested in selling.
Going the private sale route does allow opportunities to acquire successful SaaS businesses that might otherwise not have thought about selling until approached about negotiating an offer.
2. MicroAcquire Marketplace
MicroAcquire is a dedicated marketplace to buy SaaS businesses. The marketplace does not charge sellers a brokerage fee, thus this provides opportunity to buy the business at a lower multiple.
Oftentimes when listing at a brokerage, sellers will ask to “pad” in broker fees. This essentially means the buyer is paying the fees.
MicroAcquire charges buyers an annual subscription fee to gain access to the deals on their platform. They do not provide any migration assistance or act as the mediary between the buyer and seller. That is up to you.
3. Flippa Marketplace
Flippa is the largest unvetted marketplace for online businesses. While many buyers tend to focus on niche websites, there are other styles of businesses or websites available on Flippa.
There is even a section on Flippa that specifically focuses on SaaS. There are both public and confidential listings, but a good variety of potential SaaS-based business models available.
4. Empire Flippers Broker
EmpireFlippers is another solid marketplace that generally has a dozen or more listings for SaaS businesses for sale at any given time.
The layout for EmpireFlippers is great. Factors like price, revenue, multiples, and even whether or not the owner is available for interview while doing due diligence.
While EmpireFlippers does vet listings it’s still important to follow up with your more in-depth due diligence before any purchase.
5. FE International Broker
The third major marketplace known for finding SaaS deals is FE International.
Listings that are for SaaS will be clearly marked although the “Sites for Sale” section is not as well organized as it could be.
The focus with FEInternational tends to be on larger revenue sites, so be aware the options found here will require a decent sized budget.
The SaaS Business Model Explained
SaaS (Software as a Service) is a business model many people have probably come into contact with even if they don’t know it. In this model, a business provides software on a subscription basis.
So customers pay on a monthly, yearly, or multi-year basis for the license to use that software. Some of the largest SaaS offerings include Salesforce, Adobe Creative (Photoshop), Microsoft, and more.
Any software that requires a license to use whether B2B or B2C would be considered SaaS.
It’s the responsibility of the SaaS company to keep up servers, updates, and anything else needed to make sure the software is always up, working, and providing the service that was promised.
What Makes SaaS Businesses High In Demand?
Since most SaaS business models go hand-in-hand with a subscription service, they offer steady recurring revenues.
Good software that solves a problem is something customers will not only consistently pay for but are willing to pay a decent amount for.
Many individuals don’t have the serious set of technical skills needed to create excellent software and then improve, maintain, and market it.
That makes a SaaS business that has already taken care of the technical side of things very attractive to investors who know how to market, sell, or manage software developers to make improvements that would take the existing software to the next level.
Examples of Successful SaaS Businesses
Many businesses are based on the SaaS models. Some are obvious, others less so.
A sample of major successful SaaS businesses include:
- Adobe Creative
- G Suite
SaaS businesses can take many forms but keys to them are software services that often take a subscription model. Some require an online connection at all times while that’s not necessary for some others.
While SaaS businesses that size are top of the crop, there are many examples of small to mid-sized SaaS businesses that are very profitable for their owners/investors.
Why Invest in a SaaS Business?
There are multiple reasons why a SaaS business might be a great investment. A SaaS business that is doing well must already have at least one great product, have already identified a market to serve, and that means a built-in customer base.
The recurring subscription model also means steady revenues. If an investor sees some great software with mediocre marketing, that could be a huge opportunity.
- Stable recurring revenues
- Huge potential returns for each dollar of investment
- Tend to have low customer turnover, allowing the steady building of the customer base
- SaaS companies often have built-in markets that already exist
- Highly technical to build, scale, or execute properly
- Great security is an absolute necessity
- Good contract lawyers are a necessity
7-Step Due Diligence Checklist
Due diligence is a critical part of the process when it comes to purchasing a SaaS business. Make sure any due diligence includes looking at the following points.
1. Pricing Model
How does the software work? Is it a license with renewal, a monthly subscription, or some other setup?
How the pricing model is set up can make a huge difference in how attractive a SaaS business is. Some pricing models might be preferable depending on what a buyer is comfortable with or knows how to expand.
2. Business Performance: Sales, Traffic & Conversions
Performance matters. The sales numbers, the traffic to the site (and sales pages), and the conversion rate are all important when looking at potentially acquiring a business.
What’s the room for growth? Is it maxed out or is there still a lot of space to expand into?
3. Customer Acquisition Channels
A potential investor should look at all the ways a SaaS business has acquired customers and what percentage of their traffic comes from each.
Organic SEO Traffic
A SaaS site with a large amount of organic SEO traffic can be especially attractive since that means potential customers continue to discover the website and software without any additional marketing.
Paid ads can be a good way to get customers. This isn’t a red flag the way it would be with a niche site using display ads.
What type of content marketing has the company done? How widely spread is their name and reputation?
Is there an affiliate program active? What have been its results if so? If there isn’t one, could one make sense to expand the company?
Which social media platforms are driving traffic? How much, and is advertising being used on those platforms or is it natural social media traffic?
What email lists come with the company? What other email lists have promoted the software of this SaaS?
4. Technical Software Performance
How polished is the SaaS software? What’s the technology stack? Do you personally have experience with the technology the SaaS is built on? Or do you know someone that does?
Is the SaaS business the only type of its kind? An up-and-comer that has a better product than the big name in the industry? Is it known for being top of its kind or is it a necessary software that is just there while there’s plenty of room for competitors to come in with something better?
Understanding the competition is a crucial part of the due diligence process.
6. Room For Growth (Easy Wins)
Is this business maxed out or is there room for growth? Are there some obvious easy wins that could allow an investor to rapidly build a business?
Typical easy wins with a SaaS business include:
- Increasing subscription fees
- Introducing annual subscriptions if non-existent
- Introducing one-off lifetime access
- Improving conversions
7. End Goal: Flip or Keep?
What are the long-term prospects for this SaaS company? What would your plan be if you were going to purchase it? Are you going to grow it and keep in your portfolio, or grow and then sell the website?
SaaS Business Valuation – How To Determine SaaS Sale Price
There are multiple factors that go into determining an appropriate SaaS sale price.
The generic formula is as follows:
Sale Valuation ($) = Last 12-Months Total Profit ($) x Annual Multiplier
The annual multiplier for SaaS ranges from 4X to upwards of 10X at times. However, the average is around a 4X annual multiplier.
With that, there are many moving pieces to such a business. Let’s cover them below.
SDE vs EBITDA vs Revenue
These are technical terms to explain the business financials. Here is the breakdown:
- EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization
- SDE stands for seller’s discretionary earnings
- Revenue is the pure revenue generated from the business on a P&L
SDE is the most common way to value a SaaS business. It represents the benefit this SaaS business would provide to one owner. SDE is calculated by obtaining the net profit on an annual basis and adding back discretionary expenses (e.g., owner salary, personal expenses).
EBITDA is your top-line earnings before you pay any taxes, interest, amortization, etc.
A SaaS business will be either valued using the SDE or EDITDA method depending on the site. Larger businesses with more than $2M in earnings will be using the EBITDA method, and smaller businesses sub-$2M will use the SDE method.
Churn, LTV & CAC
These are technical terms to explain the operations of the business. Here is the breakdown:
- Churn represents the rate in which the SaaS business loses subscribers for a specific time period
- LTV stands for lifetime value of a customer
- CAC stands for customer acquisition costs
When buying a SaaS, you will need to calculate or obtain these data points from the seller.
For example, understanding churn is critical. If the business is churning at a rate of 5% per month but only growing at a rate of 2%, then the business will not grow quickly enough to replenish lost users.
In another example, if the CAC is too high compared to the LTV of the business, then you will spend too much money upfront to acquire new users but will not recoup their value over the lifetime of the customer. This is also a sign of a dying SaaS.
Ideally, you want the following scenario for a healthy business:
- Churn rate is significantly less than growth rate on a monthly basis (Churn << Growth)
- Lifetime value of a customer (LTV) is greater than cost to acquire a new customer (CAC)
ARPU (Average Revenue Per User)
You can calculate ARPU by dividing the total revenue generated during a specific time period (say 12-months) by the total number of active users during that same time period. This will give you the monetary value of each user on your platform.
This is an important metric that helps a buyer figure out how much new customers are worth. But more importantly, it allows you to compare apples-to-apples across other competitors.
Current Growth, Potential and Stability
If a business has been growing consistently over multiple quarters or years that’s a better value than if it’s been shedding customers.
Current growth helps let a buyer know of potential, how stable the current customer base is, and how viable it is to hold market share or even expand.
Can a clean exchange happen? Will the owner agree to help with the transition? Does the business fall apart without the owner?
Did the owner outsource to a development team? If so, does that team continue with the business?
How new or established a business is definitely plays into the overall valuation when it comes to a SaaS business.
Typical valuations use a trailing 12-month stream of revenues. If the business is less than 12-months, then it warrants a lower multiple.
However, a business that has multi-year revenue streams and data, warrants a much higher multiple than the typical average.
Valuation methodologies for SaaS businesses require further reading. Here are some excellent resources:
5 Steps To Buy a SaaS Business
Buying a SaaS business is a process. Following these five steps can help an investor know what to expect.
1. Finding the Right Deal
Don’t let FOMO affect decision-making. Taking the time to find the right deal is always better than rushing in.
Not every SaaS business is equal. Taking the time to find the right potential deal is crucial to long-term success with any acquisition.
2. Performing Detailed Due Diligence
Never skimp on due diligence. You want to confirm every number, look at every questionable or out-of-the-ordinary bit of data, and really get to know the competition.
Performing due diligence is crucial for any type of deal but especially for a SaaS business since the quality of the software and service is crucial.
3. Defining the SaaS Valuation and Multiple
It’s critical that you understand the valuation process, the metrics involved, and the industry as a whole. You should also look around for recent sales, valuation principles used by brokers, and what multiples other businesses are selling at.
This step could be heavy in negotiations, so be ready for that.
4. Making the Winning Offer
SaaS sales aren’t always one-on-one negotiations. Make sure to put in the winning offer or get to the price point where the business owner is willing to sell.
Contract, escrow, and payment terms will follow.
5. Transfers and Migration
Make sure the tech people on your time are ready for the transfers and migration to hand over the website and business.
There are several main takeaways from this article.
- SaaS businesses are in high demand
- The revenue model and potential profit makes SaaS very interesting investments
- Private negotiations are a major sources of SaaS deals
- Due diligence is crucial
- Expect negotiations to come up with a price
- Have experts on your team to help with any areas of this process you’re weak on
Keep these in mind and this process is likely to be much smoother.