SaaS adoption has grown 16x since 2015, with organizations using 130 apps on average. In 2023, buying a Software-as-a-Service business can be a seriously high-potential investment – with the global SaaS market projected to grow annually at 19.7 percent.
If you’re considering acquiring a SaaS business, you’re probably starry-eyed about a highly scalable business model with low supply chain reliance.
But before jumping the gun on a SaaS acquisition, you must heavily assess the market and conduct thorough SaaS due diligence.
Due diligence is as painstaking as it sounds, and it only gets more tedious if you don’t have a software background. From evaluating tech stacks to analyzing customer acquisition strategies, there’s more to identifying a profitable SaaS business than meets the eye.
But don’t worry – as the founder of a microPE firm that buys and scales SaaS companies, I can point you in the right direction and how to get started on the Acquire.com marketplace.
Acquire.com has helped thousands of investors acquire vetted startups by providing key business data, creating letters of intent (LOIs) and asset purchase agreements (APAs) on-platform, and even helping with startup financing through Boopos.
In this guide, you’ll find everything you need to know before you buy your first SaaS startup.
What Is SaaS?
SaaS is short for software as a service, a cloud-based software distribution model where software applications are hosted and provided to users over the Internet. You can host SaaS applications through contractual cloud providers or their own servers and network resources.
Instead of buying or custom-developing software on their devices, users access and use the software through a web browser or dedicated client for a specified time period.
For example, a legal filing agency can either develop an API for their customers to digitally sign documents or subscribe to a digital signature SaaS provider like DocuSign to fulfill the same need.
SaaS Business Model
In the SaaS business model, companies develop and maintain software and handle infrastructure, security, and updates, while customers pay a subscription fee to access and use the software. This eliminates the need for users to install, maintain, or update applications themselves, making it more convenient and cost-effective.
B2B (business-to-business) SaaS companies provide software solutions to other businesses. Examples include Salesforce, which offers a customer relationship management (CRM) platform, and Slack, a communication and collaboration tool.
B2C (business-to-consumer) SaaS companies cater to individual users. Examples include Netflix, which streams TV shows and movies, and Spotify, which streams music and podcasts.
In both cases, SaaS offers flexible, scalable, and on-demand access to software applications, simplifying the user experience and providing businesses or individuals affordable options.
Why Buy SaaS Instead of Building It Yourself?
Buying a promising SaaS business can be a big upfront investment. Should you try building it from the ground up instead?
It might be the right choice for you if you have the time and resources to take a SaaS company from zero to one. But if you can’t spend years creating a product and getting it to market, buying an early-stage SaaS business can give you a much quicker return on investment.
1. Saves Time and R&D Resources
Apart from finding a great product-market fit, the most resource-intensive part of building SaaS is development. Whether you want to assemble an in-house development team, hire a software development company, or freelance developers – development is always a high cost.
Buying a SaaS business saves considerable time and effort compared to building one from the ground up. The development, testing, and refinement phases are already completed, allowing you to focus on product refinement and scaling.
2. Existing Customer Base
Buying a SaaS business also means acquiring existing customers. This provides an immediate revenue stream, so you don’t need to build a customer base from scratch. You might also have access to measurable data and insights on customer behavior and preferences.
3. Established infrastructure
An acquired SaaS business comes with an established infrastructure – servers, databases, and software architecture. If you choose to build instead, setting up infrastructure and ensuring operational stability is quite expensive.
Infrastructure costs can be the third-largest cost after running a SaaS business, employee salaries, and server hosting.
4. Market Position
Acquiring a SaaS business with a strong market position is a massive advantage. It means obtaining a business that has already gained brand recognition, customer trust, and maybe even established partnerships.
All you need to do is improve established credibility, enter new markets, and leverage the existing reputation to drive growth and expand the business’s reach.
On the other hand, developing said market position isn’t so simple. Developing a market position often involves extensive market research, targeted marketing campaigns, and competitive differentiation strategies.
5. Reduced Risk
Buying an early-stage SaaS business reduces the risk associated with market validation and product-market fit. The business has already demonstrated some viability and revenue-generating potential.
Enterprises often choose to acquire smaller-scale SaaS companies rather than build and compete in the same space, even when they have the resources to do so.
For example, Intuit acquired MailChimp to expand its software product offerings and enter the email marketing space. Another big acquisition was Salesforce’s purchase of Tableau, which bolstered its data visualization and analytics offerings.
While building a SaaS business offers the advantage of customization and full control, acquiring an early-stage SaaS helps you focus on scaling the business.
As an investor, if your strong suit is identifying hidden opportunities and exploiting under-utilized revenue channels – buying over building is the way forward.
How Do I Choose a SaaS Business? Performing SaaS Due Diligence
Now that you’ve decided to acquire a SaaS business, it’s time to move on to due diligence.
Identifying a business with a high potential for ROI and growth is all about looking for the cracks. Since you didn’t personally build it from the ground up, there may be weak points like inefficient workflows or a high cash burn rate.
If you choose to acquire a SaaS business on a trusted marketplace like Acquire.com, you’ll receive an in-depth financial analysis of the startup you’re considering investing in.
Let’s take a step-by-step look at performing due diligence for a SaaS company.
Step 1. Analyze Accounts
Looking at the accounts is the first step of due diligence, and not just for a SaaS company.
Start with the company’s financial records. When browsing startups on Acquire.com, look for those that have connected their metrics. Understand their revenue growth, profit margins, and customer retention rates. This analysis will give you insights into the company’s financial stability and growth potential. This step is more nuanced than looking for net profit – you’re searching for proof that the current valuation is justified.
Many early-stage SaaS companies won’t have broken even yet, owing to high development and get-to-market costs. It’s up to you to look for the profit potential in the current growth trajectory.
Step 2. Understand the Pricing Model
SaaS business pricing structure often runs on a tiered or freemium model. Some companies might have a subscription plan or usage-based pricing.
Since most SaaS companies operate on MRR (monthly recurring revenue), revenue is calculated monthly or quarterly. Companies may also have an annual plan, making it difficult to calculate lifetime value of the customer.
With SaaS companies, customer retention is a major profitability focus, and it costs less than acquiring new customers. Watch the churn rate, which is the percentage of customers that stop their subscriptions on a yearly basis.
Step 3. Understand Business Development and Acquisition Channels
Customer acquisition cost, or CAC, is an important business metric for understanding how much marketing spend the SaaS company needs to get a new customer.
It’s a good idea to compare CAC to industry averages. If the SaaS company you’re acquiring falls short, identify more efficient and innovative marketing strategies to attract new customers.
Ensure you understand how sales and marketing teams operate and work together. Also, review lead generation tactics, customer support processes, and any unique advantages they have in the market.
A good business development process should have multiple acquisition channels, ideally paid advertising, organic search, and social platforms. You might find that the company relies too heavily on PPC (pay-per-click ad spend) and doesn’t allocate enough resources to organic search.
Similarly, you might find that the company gets a big chunk of its customers through referrals and inbound leads, which can potentially be a red flag and unsustainable in the long run.
Setting up a stronger search engine and social platform presence can reduce acquisition costs in the long run.
Note that this step only gauges the company’s ability to reach and serve customers effectively. Even if you find the company has a poor business development process, this can be a hidden opportunity to take the steering wheel and bring it to greater success.
Step 4. Review Source Code and Developers
When you’re buying a SaaS company, you’re buying the product. By extension, this is the source code and codebase. Depending on your own coding knowledge and expertise, you can either evaluate the source code on your own or get it reviewed by a third party. If you’re getting it externally reviewed, ask for codebase cleanliness, scalability, and maintainability.
The source code is only as good as the development team behind it. Familiarize yourself with the team as well as their experience and track record with timely bug fixes and product improvements.
Step 5. Review Tech Stack and Legal Compliance
Besides attempting to trim the fat in tech stack costs, look at the scalability, security, and integration capabilities. Certain tech solutions and software might work for the SaaS company at its current stage, but you may need to upgrade or choose enterprise-level alternatives as you scale.
Additionally, review their legal documentation, such as terms of service and privacy policy, to ensure compliance with regulations and the protection of user data.
Step 6. Market Research
No due diligence is complete without market research. You’ll need to fundamentally understand the demand for the SaaS solution and competition in the space and industry before you’re ready to choose an investment.
By doing a thorough competition analysis, you’ll identify how much market share and share of voice the SaaS company controls. Conduct your own market research and don’t just ask the company about its target audience and growth opportunities. Search for unique value propositions that differentiate the SaaS business from its competitors, and your external perspective may identify under-exploited marketing angles.
Buy a SaaS business on Acquire today
If you follow the due diligence advice above, you can easily sort the wheat from the chaff when evaluating a SaaS startup. But due diligence can take weeks, and it’s difficult to come across multiple promising SaaS businesses that fit your budget and target revenues.
On Acquire, you can find 1000s of listed startups, organized by industry type, 12-month revenue range, and even churn. Sign up for a buyer account and give Acquire.com your acquisition criteria to get startup recommendations, access the marketplace, receive key metrics, get in touch with sellers, and finally issue a letter of interest – all without ever leaving the platform.
You can also request a veteran acquisition advisor to help find the best SaaS startup for you.
Get started with Acquire today.
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