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A Short Guide for SaaS M&A Transactions

November 18, 2022
A Short Guide for SaaS M&A Transactions

Before selling a SaaS business, owners should take several steps to optimize value. Businesses are excellent assets, but unlike real estate or gold, it’s a constantly changing asset. Consequently, business owners must maintain and increase the value through day-to-day operations to ensure the best chances of a high-value sale. Here are some steps we have seen work for our clients at Persient San Diego.

Identify Your Reason for Selling

Most people assume business owners sell to make top dollar. But, is this always the main reason SaaS business owners choose M&A? On one hand, you, a passionate tech entrepreneurs, maybe looking to grow the business bigger-better-faster and are seeking the right partners with relevant experience, resources, and industry relationships to take the business to the next level – while continuing to run the business and prefer to own a small piece of a bigger business than 100% of a smaller business. On the other hand, You might want to exit the market quickly because of potential risks or change in industry dynamics. Maybe get rid of one business so that you can focus on another one you have a strong passion for in a related field. Even when money is the focus, are you trying to get capital to start another business or money to retire? Knowing your reason reduces the risk of making emotional decisions.

Determine Compatibility With Competitor Software

SaaS M&A transactions are not just about what you build but also how your product fits into the overall tech ecosystem or your potential buyer’s existing software stack. For this reason, understanding how your product works and any compatibility issues are essential. Determining how competitors are changing the playing field or adopting new trends, and how fast and efficiently you can keep up to those trends, this could affect the valuation. Work with a reliable M&A advisor to manage these risks effectively.

Understand the Intrinsic Value of Your SaaS Product

The intrinsic value of your software is a complex mix of hard and soft factors. Some things that affect this value might be the strength of your brand, the number of users or customers you have, how durable your business model is, and whether or not it has an IP component. A professional M&A advisor can help you understand the factors contributing to your product’s value and create a plan for increasing it before putting your business on the market.

Create Tailored Positioning on the Use of Each Feature

Buyers are often concerned that SaaS products are not as customizable or scalable as they would like. This can lead to frustration and misunderstandings during the sales process. To prevent this, create detailed documentation on how to use each software feature, including any limitations or workarounds. You can clarify any concerns and help ensure a smooth M&A transaction by providing potential buyers with the information they need and want to see.

Evaluate Current Business Performance

How is your business performing compared to similar companies in the market? Business owners should evaluate their performance regularly to find areas for improvement, such as increasing revenue or reducing expenses. You don’t want to go into negotiations with a potential buyer if you know there are major problems that your team could fix relatively easily but are dragging down your business’s value.

Monitor Your Key Performance Indicators

Another critical part of evaluating performance is monitoring your KPIs. These metrics indicate how well your business is performing in different areas, such as sales and customer service. An experienced M&A advisor can help you determine which KPIs to track. Then, you can use software to track these metrics easily. These further enrich your understanding of what to improve for your business.

Here are some KPIs to consider monitoring before a sale:

  • MRR and ARR: This is how much money recurring revenues are generated from customer money?
  • Customer Acquisition Cost (CAC): The lower this is the better, as it helps determine how much marketing/sales expenses it takes to acquire a customer.
  • Customer churn rate: This indicates how many customers are leaving monthly.
  • Customer Lifetime Value (CLV): This helps determine what is a customer’s worth to the firm, i.e. monetary value of a customer relationship based on the present value of the projected future cash flow.
  • Net promoter score: This measures customer satisfaction, a good indicator of whether you’ll have recurring sales with your current customers.

Work on Your Unique Selling Proposition

A USP is a crucial point that differentiates your business from competitors. It’s what makes you stand out in customers’ minds. Work on reinforcing your USP in your marketing efforts through social media or content marketing. The most common differentiating components are product and pricing. Look at your core offerings and see where you can optimize both for the best results.

You’ll need to have all your legal documents ready before negotiations with a buyer. M&A advisors can help you determine which specific documents are required. Here are some examples:

  • Non-disclosure and non-poaching agreements: These prevent buyers from sharing sensitive information with others in the market and poaching on your key employees.
  • Corporate documents information: This includes all the corporate formation and legal documents, customer and vendors contracts, employment contracts as well as your financial details and plans for your business. Some M&A advisors help create the data rooms that houses these documents to ensure confidential, secure sharing.
  • Tax and regulatory compliance papers: You’ll need to share important tax information about your business, such as annual tax returns and payroll reports.

Prepare Your Financial Records

You’ll need to share detailed financial information with buyers before a sale, so having your records in order is essential. A professional M&A advisor can help audit your books and make sure you’re ready for this part of the process. Some things that you should include are:

  • Financial statements: These will be essential documents throughout your negotiations because they speak directly to business value.
  • Cash flow statements: These help buyers understand how much money is coming into your business and going out in expenses.
  • Tax returns: You’ll need to share your most recent three years’ worth of tax returns with a buyer. 
  • Captable and debt maturity schedule: This will show the equity capitalization of your company and when you’ll need to repay debt and how much it costs.

Focus on Optimizing, Not Reinventing

Some business managers get so focused on optimizing business performance that they attempt to revamp the entire company. Businesses facing severe failure risks might benefit from this, but companies operating well could start to see a slump in sales. Focus on what isn’t working and make small, gradual changes. Otherwise, you might have difficulty measuring what worked and whether other similar changes might benefit the business.

Partner With an Experienced Team That Knows How To Handle M&A for SaaS

Are you ready to sell your business to take it to the next level or move on to your next big adventure? Whether you’re ready to invest in something new or you feel ready to retire, our experienced professionals have the resources to help you make your dream a reality. Schedule a consultation with our Persient San Diego team to get started.

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