It’s hard to determine the value of your business and come up with exit strategies. Even professionals can have a hard time with the process since it has too many aspects and variables. To help you out, I prepared a list of tips that will guide you on your way to creating the most efficient exit strategy for your business.
Before I list the steps to a successful exit for B2B companies, tech companies, and any time of online businesses, I want to define the word “exit”.
What is an Exit in SaaS?
Exit in SaaS means that an investor, trader, venture capitalist, or business owner wants to get rid of their shares or ownership of a company to investors or another company. To do that, they need a proper exit strategy. Exit strategies help business owners to reduce or liquidate their stake in businesses. Also, if their businesses have performed well so far, they can make a profit as well.
However, if the business is not successful, an exit strategy (or “exit plan”) is crucial for the entrepreneur to stop their losses. Also, if an investor wants to cash out for an investment, they can apply exit strategies as well.
The next thing I’ll say might sound shocking, but actually, an entrepreneur should add an exit strategy in their initial business plan even before starting an online business.
Yeah, you heard me right. It’s really important to plan the future of the company and include all outcomes into the plan before actually going into business. The possible exit plan can affect business development decisions and growth strategies.
The classic exit strategies include initial public offerings (IPO), well-considered acquisitions, and management buyouts (MBO). Which exit strategy a business owner prefers could depend on many aspects:
- Do they still want to retain their involvement in the business or not? If yes, how much control do they want to have over the business after the exit?
- Do they want the company to run in the same way after their exit, or doesn’t care if there were crucial changes in the way the company runs? (under the condition of getting paid well enough to sign off, of course.)
So far, I’ve covered the main idea of exit in SaaS and how it works. However, now it’s time to ask the big questions: When and why should you decide to sell your SaaS?
When and Why should you sell your SaaS Business?
Actually, there isn’t one single answer to these questions. Of course, they are some red flags, you could guess, but there are also a lot of possible answers that are not “right” or “wrong.” You should think hard and be honest with yourself about what you want. Of course, you should consider the feelings of your Co-Founders, life partners, etc. too.
I will some of the classic responses I’ve seen on the internet and received from people who sold their online businesses. If you relate one or more of these entries, you could consider your standpoint on selling your software company and start thinking and developing a suitable strategy for your business.
When you want to create things, not to control them.
Something I noticed is that people who master bootstrapping love working independently. In the end, that’s why they start their own businesses. This also means that they’re more into coming up with product ideas rather than working with a team and monitoring people.
I want to emphasize that it’s normal to enjoy different stages of your business and, at some point, get overwhelmed. There’s nothing wrong with feeling the rush of the early stages of a business but losing the spark during the later stages. After all, we’re human.
As your company grows and the management of people gets more complicated and more complex, and if you don’t enjoy it, selling your business to someone who wants to do that would be the right call.
You don’t vibe with the risk factor and want to get rid of it.
SaaS is risky. That’s why it depends on analytics and data; that’s why you need proper risk management strategies to avoid negative outcomes. With the rose-tinted glasses, it’s easy to imagine a business that will keep growing and make you millions of dollars. However, native solutions, competition, and one-in-a-million cases like the COVID pandemic can have crucial influences on your revenue in ways you would never predict.
In addition, if you’re running a company on your own or with other co-founders, you know that business financial risks are eventually the risks you take with your own finances. That’s why, when your business has grown to a certain value, trading some or all of your business would help you to get rid of the risk, leaving only dessert with the cherry on top.
You want to spend time on yourself or something else.
Long-term exits with significant earnouts and transitions are more appealing to people who have obtained outside capital and need a high exit figure to meet their personal financial goals. However, this kind of exit takes a long time.
Business owners may want to sell to so that they may acquire more capital and continue to expand the firm, but doing so would add years to their exit process and give them less control over their free time, which is what a dream exit is all about. So if you want more time for yourself, any kind of hobby, or a new business idea, you should plan your exit strategy accordingly and start right now.
You have no time to lose.
Your interest and skill reached their limit.
Since the vast majority of bootstrappers come from a technical/engineering background, the one that usually comes into play for them is marketing and growth. On the other hand, if you’re a non-technical founder, you can run into problems with technology and scaling.
You have a few options if you’ve reached a point where you don’t know how to grow your product further, or you know what to do but aren’t interested in doing it anymore.
You can focus on improving your talents in the area where you’re weaker if you’re interested and have the time, but you’ll be years behind people with experience.
Or you can outsource it by creating a new role on your team or working with a freelancer. Setting goals and managing performance for a role you’re unfamiliar with, on the other hand, can be difficult.
And the last option — you can announce that your business is for sale if you’re not interested in the options listed above.
Changes in your life
Running and expanding a SaaS business to a particular level demands significant time and mental space. In addition, if you decide on having children, raising them will have its own set of challenges, as well.
Whether it’s your aged parents or sick loved ones, someone you care about might need your help, and it will take time as well. Alternatively, you may move to a new country or get married/divorced. Sometimes life changes are planned, and other times they simply happen. In either case, they have the potential to alter our perceptions of the time and mental commitments required to run a firm.
It would be best if you had a break because you’re burnout.
Most people overlook this one, but it happens. Growing a product from nothing to a strong MRR, resolving support queries on a regular basis, experimenting with new growth hacks, updating code, and so on can take a toll on your time; especially if you launched your SaaS as a side job while also working part-time or full-time elsewhere.
Time matters because you only live once.
Combination of different reasons.
Most of the time, people don’t have a single reason for their actions, and you don’t need to sell for a specific reason. Maybe you had some problems for a while, and as the pile of reasons grew, you decided to sell. Why not?
After finding the answer to the why question, you can move on to the next question.
What kind of deal you’ll pick? Do you want a full exit? How quickly do you want the process to run? Are you looking for a full-cash exit or not?
If you have business partners, you should talk with them before the sales process starts so you can plan the most efficient process for each other’s goals and have a smoother process because you’ll have big differences identified beforehand.
So far, we have covered the thought process of the exit, but now, it’s time for action. Before I list the steps that will help you to make an exit successfully, I’m leaving a list of the best websites to find potential customers for your SaaS business.
Where to Find Potential Buyers for your SaaS Business
- https://saas.group/ – Saas Group is overall a great place to sell your SaaS business
- https://microacquire.com/ – Micro Acquire sells SaaS businesses with total anonymity with no hassle.
- https://helloexit.com/ – Hello Exit offers the best experience with their consulting team.
- https://feinternational.com/ – FE International sells your business with expert guidance.
- https://quietlight.com/ – Quiet Light will help you to reach the customer base.
7 Steps to a Successful Exit in SaaS
1- Optimize your business valuation
No matter why you’re selling your SaaS business, it’s important to provide attractive data to potential customers. To persuade a strategic buyer, there are some metrics that will help you to show why your business is worth purchasing.
Aim for consistent, steady revenue growth, possibly with an emphasis on monthly recurring revenues (MRR), to achieve a premium valuation of your company. Annual recurring revenue (ARR) is also an important measurement, but MRR is often seen by buyers as the most important, especially where recurring revenues occur more frequently than once a year while annual revenue occurs in a longer period. In most circumstances, the higher the MRR growth rate, the higher the possibility of a successful exit.
The degree of MRR growth, as well as its sustainability, is a critical element. Some organizations have been able to achieve substantial growth while bleeding cash in the process. Revenue growth and a lean cost base are preferable since this will result in the highest possible valuation for your business.
The churn rate, also known as attrition rate, is of utmost importance to most buyers. Churn is the proportion of clients you lose after a certain time has passed. It may also be defined as the likelihood of losing a client within a given time frame.
A negative churn rate is most desirable, of course. In fact, it’s even more important than the customer acquisition rate in the eyes of buyers. Negative churn happens when your revenue from existing customers equals more than your lost revenue because of cancellations. Negative churn guarantees that recurring revenue is increasing without counting possible new customer revenues.
When it comes to selling a business, SaaS companies frequently invest in new customer acquisition to boost their multiples, but attaining negative revenue churn is really more crucial. According to Totango, customer retention cost is the most important internal metric to track for 55 percent of SaaS businesses.
Cost of acquisition
The customer acquisition cost, or CAC, is the overall cost incurred by a company when it acquires a new client. This metric is important to those buying SaaS companies because it indicates how successful the company will be in the future after a takeover and change of ownership.
It’s a beneficial task to be able to reduce your CAC in preparation for a sale. Additionally, if you get most of your new business from word-of-mouth, focus on showing it since having a very favorable CAC ratio will help you boost your multiples.
2- Right timing is crucial.
Prepare as early as possible for sale, ideally a year or two ahead of time. The planning will help you improve your financial records, business structure, and client base to increase your company’s profitability.
These enhancements will also assist the potential buyer in the process of purchase and keep the company functioning smoothly.
3- Use a broker or not?
You can save money by selling the business yourself rather than paying a broker’s commission. When selling to a trusted family member or present employee, it’s also the greatest option.
In other cases, a broker can assist you to save time so you can keep your business going or keep the sale discreet, so you obtain the best price. Don’t forget the broker will also want to maximize their commission.
Discuss your expectations and advertisements with the broker, and stay in touch. Some of the websites I’ve listed under “Where to find potential Buyers” offer guidance from experts as well. After all, anyone with a business for sale can benefit from experienced perspectives.
4- Preparing for the sale
Review your financial records and tax returns from the last three to four years with an accountant.
- Make a list of the equipment that is being sold along with the business.
- Make a contact list for sales transactions and supplies, as well as any pertinent papers, such as your current lease.
- Make duplicates of these documents to provide out to financially eligible purchasers.
An overview of how the firm is run and/or an up-to-date operating manual should also be included in your information package. You should also ensure that the company is well-presented. Any damaged or worn-out components of the business or equipment should be repaired or replaced before the sale.
5- Take a step back, lower owner involvement.
Buyers will examine your SaaS business’s financials as well as how important your personal involvement is to the company’s success. You will have major difficulties selling your firm if they discover that it would struggle to succeed if you, as the owner, were not participating.
In the run-up to a sale, taking a step back from the operation to demonstrate the business’s autonomy can help you get a higher price.
6- Finding a Buyer
According to SCORE, a nonprofit organization for entrepreneurs and partners of the US Small Firm Administration, selling a business might take anywhere from six months to two years. It might be not easy to find the proper buyer. Don’t limit your advertising so you can attract more potential buyers.
Once you have prospects, you should:
- Assemble two to three potential purchasers in case the first agreement falls through.
- Maintain communication with prospective buyers.
- Before disclosing details about your company, find out if the possible buyer is pre-qualified for financing.
- If you want to finance the transaction, consult an accountant or lawyer to iron out the specifics so you can reach an agreement with the buyer.
- Allow some leeway for negotiation, but stick to a sensible price that reflects the worth of the company’s future growth.
- Any agreements should be written down. To secure your information, potential purchasers must sign a nondisclosure/confidentiality agreement.
- Get the signed purchase agreement into escrow as soon as possible.
Following the sale process, you will have the following documents:
- The bill of sale is a legal document that transfers ownership of a company’s assets to a buyer.
- A lease assignment is a legal document that documents the transfer of a lease.
- A security arrangement is a document that allows a seller to keep a lien on the company.
Furthermore, the buyer may need you to sign a non-compete agreement, in which you pledge not to open a rival firm and woo away consumers.
For businesses under $1 million, a business broker typically costs 10%; while this may seem high, the broker may be able to negotiate a contract that is better for you than the one you would have negotiated on your own.
7- Handle the Profits
Before you spend the profit from the sale, give yourself some time—at least a few months. Make a financial plan and learn about any tax implications that may arise as a result of your sudden fortune. Speak with a financial adviser about how you want to invest the money and focus on long-term goals like debt repayment and retirement savings.
In conclusion, a successful exit is not a dream, and you can also sell your business easily and successfully with the right steps. If you decide to sell your business, start considering the elements I’ve mentioned above in advance of a sale so you can optimize your valuation and increase the saleability of your business.
Frequently Asked Questions
What is a good exit strategy?
The best type of exit strategy depends on business type and size. You should consider different variables and metrics.
What is an exit strategy example?
Merger. A merger is when two businesses combine into one bigger business.
How do I sell my SaaS company?
You can find buyers through your personal contacts or contact bookers. There are multiple websites that help people sell and buy SaaS businesses. For example, helloexit.com.
Are SaaS businesses profitable?
SaaS businesses can be truly profitable; however, there is a lot of competition. Therefore, you must think about additional revenue streams and track the right metrics to success.
How do you value a small SaaS business?
Examine your company’s earnings by tracking data and perfecting metrics. Lower your churn rate, increase your MRR and reduce your CAC.