Here’s What Investors Look for in SaaS Businesses

Running a profitable SaaS business allows you to take control of your own schedule – some would even say your life! But what’s the final checkpoint for your business? At some point in your journey, you’ll need to think about your exit strategy. Here’s how to prepare for an exit when the time is right for you.

Customer Acquisition Cost (CAC) & Customer Lifetime Value (LTV)

CAC measures the cost of acquiring a customer

• Divide the cost by the number of customers to calculate CAC
• LTV measures the average value of a customer from the moment they sign up to their churn
• Aim to reach a 3:1 ratio

Important SaaS Metrics and Unit Economics

When valuing a business, it’s important not to get too hung up on any single metric.

• Focusing on improving one metric too much might not make a significant difference to your business’ valuation.

Churn Rate

Defines the long-term trajectory of a business

• Generally ranges from 3.2% to 11.2%.
• An acceptable churn rate for your business depends on what niche you’re in and why your clients are churning
• SMB SaaS companies tend to have higher churn rates due to lower demand and less sophisticated needs

Develop a Full Marketing Strategy

Diversify your marketing channels to reach different audiences

• Email marketing is a powerful way to build an addressable audience that doesn’t rely on search engine algorithms
• Build your funnel out by creating segmentations and automations
• Social media can be a powerful traffic driver depending on which platform you build a presence on

How to Make Your SaaS Business More Attractive and Valuable

Increase your business’s profitability without cutting corners

• Search engine optimization (SEO) is one of the most cost-efficient acquisition channels
• Generating high volumes of organic traffic means people can find your content and site without any ad spend

Valuing SaaS Companies Based on SDE, EBITDA, and MRR

SDE: set annual profit against an annual multiple; typically, this multiple ranges from 2-10X.

Lower churn by providing excellent customer service for higher customer retention.

Create an excellent onboarding experience

• Set up chatbots that provide automated responses
• Offering live chat support
• Outsource customer support to virtual assistants
• Find out what else people like or dislike about your tool

SDE for Businesses Valued at Less Than $5 Million

SDE reflects how much money your business makes after all expenses are paid and any salaries are added back into the business.

It’s a Seller’s Market

A wide variety of buyers are looking to acquire SaaS companies of all sizes

• The ideal buyer for lower-priced businesses might be a solopreneur looking for a hands-off stream of income
• Bigger companies acquire SMEs products with a large customer base to improve the other assets in their portfolio

Going it alone through a private sale

Unless you both set out clear guidelines and expectations on the deal process, it can get messy with communications and negotiations

• Be prepared to entertain a lot of poor offers
• First-time sellers often list their business for sale hoping for offers to flood in, but when crickets respond, fear sets in

Why Would You Sell?

The most common reasons for selling a business usually relate to the time-cost tradeoff of running it.

• Selling when you’re ready to move on allows you to raise a huge amount of capital to reinvest in other interests. There’s a massive market of buyers who’ll be happy to purchase your startup.

Protect Your Intellectual Property

Trademark if you have specific technology that gives your product an advantage over competitors

• It’s important that any of your brand’s intellectual property from patents or trademarks can be transferred legally to the new owner
• Talk to a legal advisor if you plan to register a trademark

Lower the Number of Annual Plans on Offer

Recurring annual revenue can be wildly unpredictable, whereas MRR provides a more granular insight into the business’s recurring revenue stream.

• Offer tailored plans based on individual needs if there are select cases/loyal customers who don’t fit into current pricing plans.

Transferability

Make the transition as seamless as possible. Payment processing can cause huge headaches for buyers if the account can’t be transferred.

• Document your business operations as much as possible to make your business plug and play. Creating well-documented code that can be understood by another developer ensures continuity if the new owner wants to develop the product or fix any issues.

Sustainability

Buyers pay attention to your LTV, churn rate, and conversion rate optimization.

• Have you optimized your pricing through plans that match your target audience’s needs?
• Investors will also look at how efficient your operations are at acquiring new leads.

Working With a Broker for a Win-Win Situation

Brokers attract a much larger crowd of potential buyers

• Business brokers also have processes in place to protect buyers and sellers
• Communication is streamlined on a single platform, and it’s easier to talk to a qualified buyer

Prepare for a sale

Get your P&L statement ready: past three years of taxes, balance sheet, assets, cash flow statement

• Start lowering your involvement in the team by outsourcing or building an in-house team
• Take time to think about how much you want to sell for and what type of deal structuring you will accept

Scalability

Buyers will look at how scalable your business is based on a number of factors

• Low LTV/CAC ratio may indicate that more capital is needed than expected to scale a business
• High ratio could mean your growth is slower than your competitors because you aren’t spending enough on marketing

Factors that affect the Sales Multiple

Competition

• Product lifecycle
• Technical knowledge
• CAC per channel
• Diversification
• Saturation
• Buyers have a lot to consider outside of just how much money a business makes before making a SaaS acquisition.

Improve Conversion Rate Optimization (CRO)

The goal is to increase your click-through rates for your content or promotions

• Experiment with your CTAs, copy, and image placements to see what generates the best results
• Set up different tests at the start of each week to collect data

EBITDA for Businesses Valued Above $5 Million

This metric is more suitable for mature and more fleshed-out businesses with high growth velocities and well-developed infrastructure.

• Owners tend to be thought leaders in their industry and operations are developed with department heads and teams working under them.

MRR for Fast-Growing SaaS Companies

This is a key indicator of revenue growth. Investors prefer looking at MRR rather than ARR because annual recurring revenue doesn’t provide proof of churn.

• A newer startup could be valued using MRR if it’s experiencing rapid growth and meets the following criteria: ARR is more than $2 million; Around 50% growth year after year; Founder involvement isn’t important for the business’s survival

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