When buying a business, it’s important to know what you want.
The wrong acquisition can ruin your finances and reputation. So if you’re unsure of how to start, I recommend researching different business types and industries to figure out which appeals to you most.
In this blog, I’ll cover why SaaS businesses make great acquisitions, especially for first-time buyers, and cover the things to look out for before making your first offer.
But first, what is a SaaS business?
SaaS stands for Software-as-a-Service.
In the past, you’d install business software on your computer or a private server. But now, you subscribe to the software and run it in the cloud. Salesforce, Adobe, and Shopify, for example, all use the SaaS model.
SaaS therefore saves the cost of hardware, storage, and licensing fees. You get all upgrades for free, round-the-clock maintenance and customer support, and you can access the software from any internet-enabled device.
The recurring revenue model pays for maintenance, hosting, customer operations, sales staff, and of course, the ongoing development of the software. While it’s common to see monthly and yearly subscriptions, pay-as-you-go models exist, too, so it’s a flexible model.
Now you know what SaaS is, let’s take a look at why they make great acquisitions.
SaaS is lucrative as hell
SaaS businesses typically have very low overheads. If you’re a developer and can do your own sales and marketing, it’s the kind of business you can run from your bedroom or a shared office space.
Typically, lean, agile SaaS businesses run at around 70% profit. That assumes you’re doing most of the work, or you’ve found a way to outsource it cheaply (such as using remote teams). If not, that number will drop significantly as you spend more on expensive engineers and growth marketing.
One thing to remember about SaaS margins is that they depend on scale. So when you’re looking at acquiring your first, you want to ask questions about customer numbers, growth, MRR, ARR, and churn rate that gives you an insight into the health and future potential of the business.
Or, you could take a punt if you think the technology has enormous potential in the right hands (yours!). You’d need the experience to develop it and bring it to market, or have a partner with the expertise to do it for you (though you’ll need to sweeten the deal with equity).
SaaS is one of the easiest businesses to flip
Let’s assume you’re a software engineer or have partnered with one. Building an MVP and taking it to market is a long, difficult road. You’ll make countless mistakes along the way. You’ll spend months building and even longer marketing. You’ll write and present a hundred different pitches to a hundred different people. And even then, you might not find sufficient traction to grow into a fully-fledged business.
Buying an existing SaaS business, however, is a much simpler path to profit. It doesn’t even need to be very big. All you need is to find something good, but needs a little help. The missing element – be it marketing, brand, sales, product, customer service – should align with your or your team’s expertise. That way, you bring to the table the one thing the business lacks, a kind of “golden ticket” to growth.
SaaS is an extremely competitive market, but with the right skillset, you can carve out a sizeable share. You don’t have stock to purchase. You don’t have inventory to manage. You don’t have a long list of suppliers to negotiate with, nor do you need a physical space to sell your products. But you doneed a great SaaS product, the servers to host it, a compelling brand story, and – assuming you’re not doing everything yourself – a motivated team.
With all that behind you, you can either continue growing the business or move on to something new. You won’t be the only one looking to Acquire profitable, lean SaaS businesses. The resale market is huge, and so are the profits should you catalyze growth. So why not use your skill profile to flip SaaS businesses? It’s one of the easiest ways to become a serial entrepreneur.
What to look for before making an offer
If you like what you’ve read so far, here are five things to research before making your first offer:
List your strengths and find a SaaS business that would benefit from them. Once you’ve identified what’s missing, ensure plugging the gap will make the business grow. There’s no point in contributing a stellar sales team if the product lags behind competitors on price or performance.
Flipping SaaS is often a numbers game. Get ARR, MRR, churn rates, and other financial data to project where the business is going. If growth is stalling find out why and whether you can put it back in gear.
How big is the market? Is there potential for expansion? What are competitors doing? Is there a missing story that if told would set sales on fire? Answer these questions and you’re primed for pole position.
Understand the product, its strengths and weaknesses. If it’s broken, fix it. Hire a software engineer if you can’t assess it yourself. Figure out what you need to do to maintain and develop the technology and how much it will cost.
SaaS businesses are teeming with talent. Decide who you want (if anyone), and then persuade them to stay. There are clear advantages to using existing teams as they know the business better than you do, but you might also want a clean slate – especially if the team is the problem.
The acquisition process can be a fickle one, and the better prepared you are, the less stressful the experience will be – especially if it’s your first. But whether you’re a serial entrepreneur, an angel investor, or just starting out, SaaS has some of the lowest barriers to entry and can be an easy flip with the right skillset.