Selling a Software Company: A Guide for Selling and Buying SaaS Business

The act of buying or selling a software company should never be done with anything less than long, careful consideration. There are a lot of software startups that have come and gone, never having reached their full potential even after the release of products that successfully delivered all promised features.  If you’re considering selling or purchasing a SAAS business, you need to carefully consider the company, its approach to the transaction, and most of all, its products. This applies regardless of whether you’re looking to contact the company directly, or you’ll be purchasing from a selling website.

Jump In: The Trend of SAAS in 2019

Image source: kai kalhh from Pixabay

Before you go about the process of selling a software company, you need to understand what the SAAS market climate is like. This helps set your expectations, as well as help you see how these trends may progress in years to come. Here are some of the trends and concepts that have risen in the SAAS market.

#1.       AI and/or machine learning is growing rapidly 

There are multitudes of practical consumer applications for AI, but it’s been of the particularly big interest for B2Bs. It has come to the point that having this learning feature on software isn’t a feature anymore; it’s an expectation.  One of the biggest applications for AI in eCommerce and digital marketing, is its usage in email marketing, such as a software that can personalize emails to the interests of a customer a company is trying to reach. While most businesses still leverage social media and use social media managers to connect with the audience, there’s no doubt that email marketing is a larger platform for reaching customers immediately.

#2.       Unbundling is becoming more common 

Instead of offering packages with a whole host of tools and features, a software company may instead offer core services. Think of it as similar to being able to buy individual songs from an album instead of having to buy the whole CD. Take Adobe’s Creative Cloud as an example. Instead of putting all the tools in one place like Microsoft Office, users are able to simply select which tools they need.

#3.       Pricing structures have become more flexible 

SAAS businesses are now offering optimized pricing structures, as well as plans that could extend from a month and all the way to a year. One such example of a software company that optimized pricing is Drift They claims to have built a pricing model that is inherently tied to the success of their customers. Customers who truly want to use the product will be willing to pay for it. The free plan, meanwhile, is for individuals who likely may never even use the product.

The Marketplace: Buying and Selling in SAAS

You might be wondering if now is the right time to buy or sell in the SAAS field. Will it is a wise investment in 2019, or will it be better to wait for a more lucrative time? Some studies show that some software companies have been sold for an average of 3.34x multiple in 2018. One successful software company even sold for 5.25x multiple. Image source: https://digitalexits.com/sell-software-business/ It doesn’t seem to be slowing down either. In fact, 64% of small and medium businesses will begin turning to SAAS, particularly towards cloud-based technologies. A report from PureB2B even states that 73% of organizations are trying to make their apps turn to SAAS by the year 2020. It’s clearly a fine time to get into the buying and selling the game of SAAS, especially since its growth is simply going to continue on further into the coming years.

Image source: https://www.bettercloud.com/monitor/state-of-the-saas-powered-workplace-report/

So You Want to Sell: The “How to” of SAAS Software Company Selling

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Once you’ve made the decision to sell your company, it’s time to put in the work of getting it sold for the right valuation and to the right buyer. As a whole, selling in SAAS can be very lucrative if done correctly, giving the seller enough capital to pursue another enterprise within the market or even invest in another company. But first:

1. You need to understand the value of what you are selling 

It’s very easy to fall for the wildly high-priced valuations of some startup companies that have received a certain degree of success and attention. While it does seem tempting, a more down-to-earth and realistic estimation of your software company could have it earning more in the long run. Most of the smaller SAAS businesses typically get modest earnings. To measure the size and growth of a business, you can typically break it down into:

• How long the business has been operating
• How involved the owner has been in its operations
• The trends of its growth (its features such as its accessibility, what it does, number of users interested, number of people who have downloaded it, and are actually using it, etc.)

2. You need to hire a sales team 

While the first instinct may be to manage the selling of the business on your own, you have to face the reality that sales teams are hired because of their expertise. Their know-how would show the best way to sell a software company and quickly get you more leads that would result in your company being purchased.

3. Optimize and begin an email campaign 

Email marketing has been one of the best and most direct ways to seek out potential leads who may be interested in buying your software. An amazing email campaign should:

•  Use more “human” email addresses. An email address that has “sales” at the end of it is often considered a turnoff, coming off as disingenuous. Use email addresses that feature your name with a company domain. Make sure the first email counts, that you have their attention right away.
• Send a widespread email campaign. According to Christoph Janz, one of the world’s foremost SAAS investors, “If no one is calling your emails spam, you’re not sending enough.”
•  Make use of activity-based emails. Make sure the emails show where a customer can sign up. Send them another email when they sign up, when they visit an account, when they cancel, and when the trial is about to end. Make sure the campaign is on top of your lead’s movements.

4. Get the books straightened out 

Recurring revenue attracts buyers to a software company. You have to start maximizing revenue (get more people downloading the software, for example, or make sure previous users come back, which lessens cancellations) and minimizing costs (try to limit human involvement. Use FAQs, tutorials, and other support material in lieu of having human-to-human contact).

5. Clean up the source code 

Documentation is of absolute importance. If you’re selling your multi-million dollar SAAS business, the code should be clean, tested, and verified. Companies with clean codes are often the ones that are sold.

Add it to the Cart: Buying a SAAS Company

If you’re aware of what to do when selling, buying a software company becomes an easier process. You have to hold the businesses to the same standard that you would expect if you were selling it for a high-dollar valuation. Most companies purchase a SAAS company to absorb it into a larger entity. At this high level, you need to consider the potential acquisition by their:

• Numbers 

As mentioned earlier, the act of buying a company is dependent on the numbers game: Number of years of operation, growth metrics, number of users that have downloaded the software or tools, etc. Along with the numbers, you need to determine your own budget, marking the metrics against what you are willing (or able) to purchase it for.

• Source code 

Clean source code is the sign of a SAAS company that made sure its documentation is complete. The source code, above all else, needs to be tested and verified. You can’t purchase a software company and its products without knowing that its code is working properly and that there won’t be problems with it down the line. It’s important that you get an excellent software engineer who can look at the source code for you and spot any problems before making the acquisition. At this point, it’s also very useful to request a demo to see that everything is working.

• Search for reviews and opinions 

Don’t be afraid to reach out to experts, colleagues, as well as people who may be looking to use this software company’s tools in the future. This is part of making a true, comprehensive analysis of the company. Are its software’s features really something that users need or want? Is its user interface easy to navigate? Does the company’s product look as though it will continue to be needed or developed through the years, or will it be rendered obsolete? The opinion of colleagues and experts in the field can give you more insight.

Observe the Best of Them

The right acquisition can make a huge impact in the SAAS niche market. Take Slack, for example. At the time of its inception, one where there were already numerous messaging platforms, does the market really need another one?

Image source: StockSnap from Pixabay 

Slack, however, entered the market offering its main product that combines all the online internal messaging tools that a business needs. It can internally message across an entire company, separated into channels, allow for video conferencing, and even make use of bots to automate some moderation tasks. Now, Slack is one of the most popular messaging platforms for businesses all over the world.

Conclusion

Whether you’re selling a software company or buying one, it’s all about having the right acquisition, which has the potential to address users’ needs. It’s about seeking out what a company needs, what the market needs, and what the wisest course of investment can be. Are you preparing to sell a software company? What do you feel your company offers that others in the market cannot? And if you’re planning to buy a company, what do you find that you are looking for? Let us know in the comments below. Get a better understanding of how the buying and selling of SAAS work by heading to this page and getting more valuable insights on the market.

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Author bio: Aaron Chichioco is the content editorial manager of designdoxa.com. His expertise includes not only limited to the topics about Web/mobile design and development but digital marketing, branding, and eCommerce Strategies as well. You can follow Aaron on twitter at @Aaron_Chichioco