220: How to Buy or Sell a SaaS Business
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In this episode, Steli and Hiten talk about buying and selling a SaaS business. With a lot of experience in both buying and selling SaaS businesses, Hiten shares how he evaluates whether a company is worth buying or not. Hiten also shares tips on how you can get the most out of the deal from both the buyer’s side and the seller’s side. Tune-in to find out the importance of doing your due diligence when it comes to making a deal and why it’s important to question a buyer’s motives.
Time Stamped Show Notes:
- 00:05 – Today’s episode is about how to buy and sell a SaaS business
- 00:35 – Personally, Hiten has bought and sold SaaS businesses including Holo Bar and Stride
- 01:08 – When buying a SaaS business, evaluate the financial aspects and your capacity to grow the business as well as if it satisfies a need that you have
- 02:15 – Ask yourself if it can make you more money—if not, don’t buy it
- 02:54 – The exception is buying tools that don’t make money, but will help you get more money
- 03:11 – The most common reason founders sell is because they get tired of it
- 04:32 – If the ARR (annualized recurring revenue) is more than 1 million and is growing at a healthy pace, you can predict what would happen if you were to buy the business
- 05:35 – Prior to reaching 10 million in revenue is usually just a small transaction
- 06:38 – In Hiten’s experience, they tend to buy businesses that come to them or they buy if they really like the business
- 07:06 – Hiten is not looking for businesses to buy; but, most of the time, they are connected to sellers that do not want their businesses anymore
- 07:46 – Look at your own financials and theirs and see if it can make you more money—do the math
- 08:17 – Assess when you can get your return of investment
- 08:31 – If you are a seller, help the buyer figure out how they can get more money and when they can get it
- 09:03 – The buyer and the seller should talk about what they can both get from the deal and settle on a price
- 09:12 – When the buyer is hunting down companies, the seller is at a disadvantage because the buyer already has a price in mind that they’re not telling the seller
- 09:34 – If you are the seller and the buyer hunted you down, ask yourself why the buyer wants to buy your company and estimate the price
- 10:21 – Every deal is a separate deal and it relies on the terms
- 10:53 – When deciding the structure of your deal, ask yourself why the buyer is buying
- 11:00 – The biggest red flag is a misalignment—to avoid this, ask questions
- 11:38 – When doing a deal on the phone or in person, make sure you have a written document, so you are both aligned
- 12:01 – Do your diligence
- 13:33 – If you are selling, talk to your broker about everything, but you don’t necessarily have to go with him
- 13:58 – The broker can help you calibrate as they have the data and can look from the buyer’s perspective
- 14:51 – If you are a buyer, also go to your broker
- 15:33 – It is much harder to start a SaaS business than to grow one
- 15:36 – End of today’s episode
3 Key Points:
- Before buying a SaaS business, make sure it can either make you more money or be a tool that helps you get more money.
- For the buyer and seller: discuss your terms, find an agreement, and have it in writing.
- Growing a SaaS business is easier than starting one from scratch.
Steli Efti: Hey everybody, this is Steli Efti.
Hiten Shah: And this is Hiten Shah. And today on The Startup Chat, we’re going to talk about how to buy and sell a SaaS business. Where going to focus on, sort of, both sides. But we’re also … I think it’s going to go pretty quickly. The main reason is, I personally don’t have much to say on this. I bought and sold several dozen SaaS businesses. Both my partner Neil and I, we buy SaaS products relatively often. We don’t really announce most of the ones we buy. The ones that have been announced … We bought Hello Bar back in 2012, which is one of the first businesses to add a bar to your website. Now there’s a bunch, like dozens. And then we also bought a CRM, called Stride, a while ago as well. And then we sold it. I guess for me, the things I would say is if you’re buying a SaaS business, you have to just look at the business. Often I just see people not looking at the business. It’s all in the business. Meaning, look at the financials, try to get to those numbers, understand the MRR and all the SaaS metrics, because that’s the main thing that you’re going to have to help you evaluate whether you should buy it. The other thing is, when you do that, you should then be evaluating on, “Can you actually grow this business?” Or does it satisfy some need that you have. For example, at Close.io, just to pick on you Steli, you have a SaaS business, it’s a CRM tool … I don’t think you guys are integrated with Gmail yet. Right?
Steli Efti: Yes, that’s right.
Hiten Shah: Yeah, so you’re not integrated with Gmail. And let’s say there’s a SaaS tool out there integrates with Gmail, and you want to buy it. You would evaluate things like, “If we bought it, is it going to make us more money? If we bought it, is it going to make our customers happier and then make us more money? If we bought it, does it add a feature that would take us a long time to build or a lot of money, and is it either cheaper or smarter in some way to just buy it, and then, guess what, it’s going to make us more money?” So at the end of the day when you buy a SaaS business, you want to make it more money, or you want to make the business that’s buying it, if it’s an existing business that’s buying it, more money. Otherwise don’t buy it. That’s my biggest piece of advise on a SaaS site. If you can’t grow it, or if won’t make you more money in some way, don’t buy it. And there’s a lot of exceptions to that, but on a very high level that’s been the rule of thumb that I would use. I made mistakes around that … One of the reasons we bought a CRM and then sold it, is we just thought we could grow it a certain way … We actually could, but then we didn’t want to work on it anymore. And we didn’t want to have on of those businesses out there. So we are not competing with you Steli, it feels great. We had one of those, and we are constantly just buying tools that don’t make money. So we’re buying SaaS tools that don’t make money, because it helps us make money. We can augment it. We can get leads from the tools, and things like that. There’s a lot of those kinds of things that we’re buying. But you always want to evaluate it from a business perspective, more than anything else. And when you are selling it, usually in a SaaS business you’re selling it because you’re tired of it. It is the most common reason, believe it on not, that I hear from founders. And I would reevaluate whether you should sell it, if its making money and if there is a way to grow it on your own, without anybody else. So I’m sure you have some questions, or some of your own thoughts on this. I’d love to hear what’s going through your head.
Steli Efti: Yeah so I love the basics here. You’re like, “Hey, can this make us more money, or is this making money?”. So looking at it as a business not, necessarily, just looking at the tool. But let me ask about pricing. This could help us make more money, but it also cost money. Now we have to make some kind of a simple math, in terms of how much money we could make with this. Or do you think is reasonable to make and then how much are they asking us for. And can we afford to put that money down or to finance that, or whatever the financial structure of it is. Do you think that it makes a big difference … So is there a multiple involved or basic math involved? I already know that answer and I’m setting myself up for failure, but how do you think about the price tag that you attach to the product that you buy here?
Hiten Shah: It’s very arbitrary, because it depends on the size of the SaaS business. If the SaaS business is doing more than a million bucks a year in ARR, Annualized Recurring Revenue, and is growing at some healthy pace, like five plus percent month over month. I don’t necessarily consider that healthy, but that’s healthy if you’re buying it, then you can be a little predictive about what would happen if you didn’t do anything and you bought the business. But it has a lot to do with opportunity, and I don’t really have any good metrics when we’re talking about smaller SaaS businesses. I’ve seen as low as one X on the Annualized Recurring Revenue all the way up to five, in those categories. I’ve also seen deals where people will not even have to pay a year of recurring revenue to buy it. And a lot of times its because of profit margins are different or there’s other components in the business. So I don’t really have a heuristic on this in anyway. And when a business is not making any money, and it’s like a really early, then all bets are off. Usually the buyer is trying to get the lowest price, and the seller is obviously trying to maximize whatever they can get out of it. Most of the time on a smaller SaaS site its a lot of negotiation. And honestly, prior to 10 million in revenue, it’s usually just a small transaction. Some level of small. Whatever that means.
Steli Efti: What about buying versus selling? The SaaS SAPs that you’ve bought … So to put that out there, we’ve never bought a SaaS company. We’ve been offered a bunch of them, over the years, and most of them we have not really seriously considered. There were two cases where we seriously considered buying them and then ended up not, for various reasons. One of them you were actually, fairly, well informed and involved in … Where I was talking to you about that a few times, to give your advice and insight. But we’ve never pulled to trigger for various reasons. But the companies that you bought, the SaaS apps that you bought, were those all you deciding strategically you want to buy a tool like this or a company in that space, and then going and finding one. Were those all opportunities fallen your lap … They reached out to you, you offered?
Hiten Shah: Yeah.
Steli Efti: Or was it mixed?
Hiten Shah: For us the ones that are making money usually it’s opportunistic. Somebody comes to us and says, “I want to buy this thing.” The ones where they’re not making money, and we just like what they’re doing, and we think we want it, we’ll just go buy it. We will literally go to them and be like, “We want to buy this thing.” And the reason is, we don’t really like post revenue deals where we’re going after them, because we are not trying to buy and sell companies. That’s not our main job. We just like being opportunistic. Most of the time if something is making money; The seller is generally not wanting it anymore. For one reason or another. Usually it’s very personal reasons. And so then they are looking for buyers and they talk to multiple people or ask somebody they know, et cetera. Or hire someone who can help sell it, and we get hit up, and five other folks that are the same get hit up about it. Or people like you that are in the same or whatever the business. Usually it’s inbound, for us. We’re not going around hunting these down. That being said, I would if it made sense. Like if there was something very specific we were looking for, we’d go hunt it down and buy it. But again this is the part where everyone get wrong. Look at the financials, yours and theirs, and go figure out if it can make you more money. That’s what you did, when you were looking at those deals … The one we were talking about and others. Will if help us make more money? And do the math. That’s the other thing I don’t see people do. We buy it. They have this many customers. We have this many. We think this percentage would get up sold to something new, that is based on their technology or is exactly their technology. Things like that, and do some estimates to really understand how long it will take to pay back the amount of money you spent on it. Pay back, when you pay yourself back. What’s your break even point to the transaction? Those are the business basics that everybody misses. And also if you are a seller, go help the people that are buying figure that out. If you can. If its a transparent exchange and you guys can’t really figure out the team and people involved … The buyer, the seller can’t figure out the price; The best this to do is “Is it going to make you money?” That’s what I will ask, if I was selling something. Is is going to make you money if you buy it? Great. Can I help you figure out how its going to make you money? I’m not looking for all that value. If I can help you figure that out, maybe we could come to a price. Because if the buyer can’t name a price, then you’re going to be stuck. If the seller doesn’t name a price, you’re stuck. The best thing to do is talk to each other and say, “What can this thing do for you?” And then play it out from there. A lot of scenarios are like to buyers hunting down companies and trying to buy them. In that scenario the buyer has a lot more information, about what they want to do. And the seller is at some level of disadvantage, in those cases. The buyer won’t necessarily want to talk about what they want to do, in as much detail. Again, a lot of this is scenario based. But at the end of the day, if you’re the seller and you’re in one of those scenarios. Where the buyer hunted you down, and the price is known to the buyer of what they are willing to pay, but they won’t tell the seller? Then it’s the seller’s job to really do some estimates and try to figure out why this person wants the company. And what is it really worth to them. And what’s it worth to me to sell the company.
Steli Efti: Are there any red flags that are independent of this? Let’s say you’ve done the basic business math and you decide, “How can we make more money with this? What will it cost us? How much will it take us to get a return on our investment?” Just going through these basics … Let’s say a deal looks positive on the pure math. Are there other factors that will play into buying it or not buying it. Things like-
Hiten Shah: Oh my God Steli. There’s a million. Every deal is a separate deal. So then it boils down to the terms. How long do I get paid out for? How long before I get my money? Is there any money held out? What are the requirements on my end, that I need to do, as the seller; in order to get the money? There is a transition of the team and all these complexities … They aren’t complex, but considerations that both sides need to be honest and real about. That’s why if you can understand why the buyers buying, that’s your ultimate piece of information. That can help you structure a deal. That’s why there’s deal structure, and criteria. The biggest red flag, we love this word Steli, there’s a misalignment.
Steli Efti: Misalignment, yeah.
Hiten Shah: And that doesn’t come out till late. My advice for both sides is ask the questions, write them down. And make it as if both sides are filling out a questionnaire. That would be my biggest piece of advice, to be honest. I’ve never seen two deals look the same. Ever. Go ahead.
Steli Efti: Would you advise for people to try to meet in person, or at least talk on the phone, or would you go back and forth in writing and try to keep the conversation writing.
Hiten Shah: I love all those methods. And it really just depends on the parties. But if you’re talking and you get to specific numbers, on the phone or on any venue that’s not recorded, like an email. Then make sure you send a follow … This is general best practice, but … Go send a follow up email. One of the parties needs to be able to recap what you guys discussed, so you’re both aligned; If you’re seeking alignment, first and foremost, on the deal. You’re trying to get alignment on the deal, not just the cash but the whole deal. So one tune I’ll throw out, before this is done, do your diligence. If someone’s a buyer, they’ve likely bought a lot. That’s the most common case out there. If they haven’t bought a lot, then still do your diligence, and talk to them more. “Oh, you haven’t bought anything before, cool. So this is foreign to both of us, great. Let’s talk about this and lets talk about both of our expectations and requirements, before we jump in.” But if they are a common buyer, go talk to every single person you can that’s ever sold a company to them.
Steli Efti: I love it. Most people that listen to a podcast, their going to be either in that spot where they have a small app and they are kind of sick of it, and they want to move on. Or they might be thinking about getting into the world of business, and potentially thinking about purchasing as a way to get kick started. Let’s talk about these two scenarios, not like larger multi-million dollar SaaS companies. Let’s say you have a small app, and it makes five to 10k in MRR, and you’re thinking of selling it, for whatever reason. Let’s say you’re sick of it. Let’s say you want to do something else. Let’s say whatever it is, would you advise them to think about who could really benefit from this? Who would be a natural fit? And then just write up an email and co-email a bunch of people. Or would you advise them to go to a broker? There’s brokers out there that help seller and buyers in the SaaS space to come together. What would be your general advice to those people?
Hiten Shah: Talk to your broker, and learn everything you can. But don’t necessarily go with the broker. The brokers have a lot of data about what’s working right now and what’s not. The broker are super happy to talk to you. That’s their job. Go to a broker and learn everything you can. That would be my first step. Even these days I talk to brokers all the time. They give you a good idea of the landscape on what’s available, from a buyer’s perspective. But at the end of the day, the brokers have a lot of data on SaaS, right now. They can help you calibrate. Even the answer I gave on, what’s this thing worth? They’re going to have way better answers, based on at least the deals they’ve done. These small deals have no real, legit, heuristics. But these brokers have been buying and selling for a bit, and so they have a rougher, better, idea of what things are bought for. For me, I’m a buyer to, so I’m bias. I want to spend as little as possible when I buy something. That’s just the approach, because you’re spending your hard earned cash.
Steli Efti: Yep. I think that’s useful. Now let’s wrap the episode up with the other side. You want to get into SaaS, and you don’t have an app yourself; Do you think its advisable to purchase one? Would that be something you would advise anybody do? “Okay you don’t have a SaaS app, you know that market you want to go into, go and buy something small and grow it.”
Hiten Shah: Yeah, absolutely. Go talk to your broker, and see if anything is available. Or go hit up some companies. It’s business. It’s just like any other business. If you want to get into the business of selling donuts, what do you go do? You either go start a Dunkin Donuts, or something like that, a corner donut shop and go through that whole process. Or if you have some capital, and you want to transition into that kind of business, you just go buy one. And the way you do that is by talking to people in the space that might be willing to sell or talking to someone who has access to these companies. Absolutely, if you want to get in SaaS, please get in SaaS. Please go talk to these companies and handle it. Honestly, I say that because it’s much harder to start a SaaS business, than to grow one.
Steli Efti: To grow one, yep. This is it for this episode and from us.
Hiten Shah: Cheers.