{"id":1402,"date":"2024-09-19T19:25:01","date_gmt":"2024-09-19T19:25:01","guid":{"rendered":"https:\/\/founder-exits.com\/?p=1402"},"modified":"2024-10-14T12:49:21","modified_gmt":"2024-10-14T12:49:21","slug":"3-keys-for-selling-your-saas-business-for-higher-than-market-value","status":"publish","type":"post","link":"https:\/\/founder-exits.com\/3-keys-for-selling-your-saas-business-for-higher-than-market-value\/","title":{"rendered":"3 Keys For Selling Your SaaS Business for Higher Than Market Value"},"content":{"rendered":"\t\t
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In<\/span> today\u2019s issue, I\u2019m going to focus on the three things that I would overpay <\/span><\/b><\/span><\/h4>\n

t<\/span>o buy your SaaS business (<\/span>as would most business acquirers<\/i>).<\/span><\/b><\/h4>\n<\/div>\n
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Focusing on these three traits in your company will help you sell your business for higher than average market value.<\/span><\/p>\n

 <\/span><\/p>\n<\/div>\n

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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<\/i>), if you work to make sure your SaaS has these traits in the business before<\/b><\/i> you bring it to the market for sale.<\/span><\/p>\n<\/div>\n<\/div>\n<\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Most SaaS Business Aren't Prepared to Sell<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Most of the time, SaaS founders aren\u2019t 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. <\/span>As a founder, when you want to sell, you\u2019re competing against all other SaaS companies in the world for the same limited business buyer dollars. <\/span><\/span><\/p>


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The market you\u2019re selling your business into has plenty of supply, time, and cash to wait for the<\/span> <\/span>right<\/i> <\/span>business with the<\/span> <\/span>right<\/i> <\/span>traits. <\/span>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.<\/span><\/span><\/p>\n<\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Startup Advice is Oftentimes Poor Advice
When Pivoting to Selling a SaaS Business\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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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\u2019s time to sell.\u00a0<\/span>Let\u2019s dispel some of those mistakes and focus on how to increase the value of your company on the market, shall we?<\/span><\/p><\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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What 3 Traits Are Buyers Looking for
and Your True Customer\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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  • Who is your Goal Customer?<\/span><\/li>
  • Predictable Revenue Growth<\/span><\/li>
  • High Profit per Headcount<\/span><\/li>
  • Low Customer Churn<\/span><\/li><\/ul><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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    Who is Your \"Goal\" Customer ?\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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    (Hint, it\u2019s not the customers paying you today)<\/i><\/span><\/strong><\/h4>

    Remember, you always have 2 customers for your business.<\/span><\/p><\/div>

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    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.<\/span><\/p><\/div>

    \u00a0<\/span><\/p>

    The\u00a0other<\/i>\u00a0customer is the group, person, or team that you’re going to sell the business to in the future.<\/span><\/p><\/div>

    \u00a0<\/span><\/p>

    How often do you think about that second customer in your future planning of your business?\u00a0<\/span>Your future acquirer, that latter customer, would easily pay you more for your business with these three traits already imbedded in the business\u2026<\/span><\/p><\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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    Predictable Revenue Growth\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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    The first thing an acquirer is looking for is\u00a0Predictable<\/b>, boring, and increasing\u00a0Revenue<\/b>\u00a0Growth<\/b>.<\/span><\/p><\/div>

    \u00a0<\/span><\/p>

    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.<\/span><\/p><\/div>

    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.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    That’s what buyers are looking for\u2026something predictable, even if it’s boring.<\/span><\/p><\/div>

    We’re not looking for hockey stick growth.<\/span><\/p><\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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    Misguided Entrepreneurial Advice\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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    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)<\/i>.<\/span><\/p>

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    The idea is that you should be acquiring users no matter what the cost.<\/span><\/p><\/div>

    All of that popular entrepreneurial advice is not helpful when you sell the business and actually will harm the sale price of your business.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    Predictable, routine, and uninspiring revenue growth is preferable to periodic spikes from giveaways, Product Hunt launches, or exploding CAC costs.<\/span><\/p><\/div>

    We buyers want something that’s predictable, something we can plan out long term.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    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.<\/span><\/p><\/div><\/div>

    \u00a0<\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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    High Profit per Headcount\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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    The second trait is High Profit per Head Count<\/b>.<\/span><\/p><\/div>

    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.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    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.\u00a0<\/span>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.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    Those are not the same companies. Not when you\u2019re selling the business.<\/span><\/p><\/div>

    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.\u00a0<\/span>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.<\/span><\/p>

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    Those two are valued completely differently.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    One may say, \u201cHey, the industry average is 4x for SaaS businesses<\/i>\u201d.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    Well\u2026True.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    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\u2019t valued the same.\u00a0<\/span><\/p>

    \u00a0<\/span><\/p>

    I\u2019m sure there\u2019s some official business term that I slept through at my MBA program, however I discount the extra \u201chassle\u201d a business with 40 low-profit team members would bring to my life and would likely pass on the business.<\/span><\/p><\/div>

    So, remember, the second important thing is to have a high profit per headcount.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    Focus on that and ignore entrepreneurial and Silicon Valley advice; do not add headcount if your profit\/headcount is already low.<\/span><\/p><\/div><\/div><\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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    Low Customer Churn\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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    The third thing that’s important is stickiness, which we usually call\u00a0Low Customer Churn<\/span>.\u00a0<\/span>All SaaS founders are versed in churn, so this doesn\u2019t require a lot of explanation.\u00a0<\/span>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.\u00a0<\/span>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.<\/span><\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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    Why I'd Over Pay for These 3 Things all Together in the Same Saas\n<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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    If your SaaS has those three traits, then you can sell your business for a higher than average multiple.<\/span><\/p>

    \u00a0<\/span><\/p><\/div>

    It\u2019s not rocket science:<\/span><\/p><\/div>