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3 Keys For SellingYour SaaS Business for Higher Than Market Value

3 Keys For SellingYour SaaS Business for Higher Than Market Value

Three things that I would overpay to buy your SaaS business (as would most business acquirers)

Michael Frew
June 11, 2024

Hello there,

Michael here again. It’s been a while! That’s my fault, been busy…

I’ve been reviewing a lot of businesses for sale and there are quite a few things I want to tackle for Founders in the next few newsletters.

First, let’s start with an essay that can really gain Founders some extra cash in their pocket during a sale…

This newsletter may get truncated by your email app. It's best to read the online version here. (The online version also includes relevant images, tweets, and references).

In today’s issue, I’m going to focus on the three things that I would overpay to buy your SaaS business (as would most business acquirers).

Focusing on these three traits in your company will help you sell your business for higher than average market value.

By that, I mean you can demand a higher multiple from a buyer and walk away with a lot more money (on less onerous terms), if you work to make sure your SaaS has these traits in the business before you bring it to the market for sale.

Most SaaS Businesses Aren’t Prepared To Sell

Most of the time, SaaS founders aren’t building their businesses with a plan to sell.

Unsurprisingly, when they want/need to sell their business, there were choices made in the past that hurt their future sale price.

As a founder, when you want to sell, you’re competing against all other SaaS companies in the world for the same limited business buyer dollars.

The market you’re selling your business into has plenty of supply, time, and cash to wait for the right business with the right traits.

Fortunately, some SaaS businesses already have these traits already inherent in their SaaS processes and makeup, whereas other companies have to work to add these features to allow them to be in a prime place to sell the business for top dollar.

Startup advice is oftentimes poor advice when pivoting to selling a SaaS business.

A lot of times, you're being told by your professors or the entrepreneur community to do things that don't actually match up with what buyers are looking for when it’s time to sell.

Let’s dispel some of those mistakes and focus on how to increase the value of your company on the market, shall we?

What Three Traits Are Buyers Looking For and Your True Customer

Who is your Goal Customer?
Predictable Revenue Growth
High Profit per Headcount
Low Customer Churn

Who is your “Goal” Customer?

(Hint, it’s not the customers paying you today)

Remember, you always have two customers for your business.

One customer is the group you are most likely familiar with on a daily basis. These are the customers that you sell your product or service to on a monthly or annual basis.

The other customer is the group, person, or team that you're going to sell the business to in the future.

How often do you think about that second customer in your future planning of your business?

Your future acquirer, that latter customer, would easily pay you more for your business with these three traits already imbedded in the business…

Predictable Revenue Growth

The first thing an acquirer is looking for is Predictable, boring, and increasing Revenue Growth.

Even if the revenue growth is very small, even a small percentage each month, over many years that starts to make really big differences to the bottom line.

Personally, I have a few companies that make a very small increase each month, but now that I've owned them for five to ten years, it makes a massive difference in my revenue and net income.

That's what buyers are looking for…something predictable, even if it's boring.

We're not looking for hockey stick growth.

Misguided Entrepreneurial Advice

In the entrepreneur community, you're always told to try and go for hockey stick growth, or to put your startup side hustle on product hunt (which, for a seller, is terrible advice).

The idea is that you should be acquiring users no matter what the cost.

All of that popular entrepreneurial advice is not helpful when you sell the business and actually will harm the sale price of your business.

Predictable, routine, and uninspiring revenue growth is preferable to periodic spikes from giveaways, Product Hunt launches, or exploding CAC costs.

We buyers want something that's predictable, something we can plan out long term.

We want to be able to model it out so that we understand what's going on one, two, and five years from now so that it's all predictable and reliable growth.

High Profit per Headcount

The second trait is High Profit per Head Count.

One of the biggest differences I'm seeing in 2024, probably continuing into 2025, is a lot of businesses that used to be VC funded are showing up for sale on marketplaces and brokerages.

Now that VC funding has dried up, these companies are inventing profit by cutting out some of their marketing and sales, yet they continue to keep their over bloated head count.

Even with that high head count, they're trying to sell at the same multiple as a business making the same amount of money with a much lower head count.

Those are not the same companies. Not when you’re selling the business.

For example, let's say you make a million dollars in profit per year, but you have 40 employees and took on investment from a Silicon Valley VC.

That is a completely different business than a company that's also making a million dollars in profit, but only has one contractor and maybe the original entrepreneur working in the business.

Those two are valued completely differently.

One may say, “Hey, the industry average is 4x for SaaS businesses”.

Well…True.

But if you're bringing 40 employees, a retirement program, health insurance costs and expect to get the same valuation as the business that has none of that overhead and is leveraging 4x - 5x the profit per headcount, I'm going to tell you those two businesses aren’t valued the same.

I’m sure there’s some official business term that I slept through at my MBA program, however I discount the extra “hassle” a business with 40 low-profit team members would bring to my life and would likely pass on the business.

So, remember, the second important thing is to have a high profit per headcount.

Focus on that and ignore entrepreneurial and Silicon Valley advice; do not add headcount if your profit/headcount is already low.

Low Customer Churn

The third thing that's important is stickiness, which we usually call Low Customer Churn.

All SaaS founders are versed in churn, so this doesn’t require a lot of explanation.

However, for the sake of thoroughness, low churn in a business makes it very hard to pull customers away from and easy to value going forward into the future.

That's why I look at companies that are infrastructure, developer tools, and things that people either love or can't remove from their system without breaking their business.

Why I’d OVER pay for these three things all together in the same SaaS

If your SaaS has those three traits, then you can sell your business for a higher than average multiple.

It’s not rocket science:

Boring, predictable revenue growth
High profit per headcount
Low churn with a sticky product or service

First of all, I’d over pay because all three of those things are really rare to find in one company.

I would pay a higher multiple for this type of company because so many of the risks of ownership are negated with this type of business model.

If you have all those things, buyers are going to salivate for your business.

That’s always what I’m looking for when I’m trying to acquire a business.

That’s always what I’m trying to build after I acquire a business.

So if you can spend a year or two working on your business, adding those pieces in there, getting the headcount down, making it more sticky, making your revenue more predictable, you're going to be able to sell for a much better multiple in the future.

It's worth the investment right now because buyers like me in the future want to give you more money when we buy a better business.

If you are a Founder and may look to sell your SaaS business in the future - or know someone who may - make sure you’re signed up for my Newsletter and YouTube channel.

Not ready yet? Start executing what you learned in this issue.