Not everybody can build a successful startup. In fact, it’s quite rare for somebody to come up with a startup idea that can be turned into a successful business. But what if you could buy an existing business and turn it into an even bigger success?
SaaS businesses are relatively new in the world of online services but they are here to stay. This knowledge alone can motivate you to go ahead, dive in, and buy the first great SaaS business that you see on sale. But before you sign the contract with the seller, there are few things that you should keep in mind.
Considerations for Buying SaaS Business
Here’s what you should consider before buying a SaaS business:
1. Due Diligence
This is the process of thoroughly investigating a SaaS business before you finally decide to buy it. It’s like buying a new set of clothes from a physical store and checking each piece for signs of wear, tear, and factory defects. In the context of buying a SaaS business, this process requires you to check more than just what the seller may be willing to reveal to you at the time of inquiry.
Why is this important? For three main reasons:
You can see the advantages and disadvantages of buying the business.
Businesses have their strengths and weaknesses no matter how much their revenue is for the past years. This is no different than weighing the pros and cons of a company and comparing it side-by-side with another similar SaaS business.
Due diligence prevents unwanted revenue loss.
If you eventually discover that a business that you’re interested in isn’t as lucrative as you thought it was, you’re already saving yourself from the headaches of saving it from bankruptcy. In case the SaaS business in question can provide more benefits than harm but is on the brink of a loss, you may also use due diligence to see if you can do something to prevent its eventual doom. However, this case may be rare so it’s better not to sweat it.
You can avoid getting in trouble because of the fine print in your contract.
It’s surprising that some SaaS business buyers still fall for this. Thoroughly check the contract for anything that may bring you potential hurdles, especially legal and financial implications that may take place after the deal. If you don’t understand any part of the contract, consult with your lawyer to be on the safe side.
2. Getting Started
Determine the minimum selling price.
Include a margin for the total price to account for the broker’s compensation and other similar fees.
Transactions mediated by brokers, middlemen, and other similar entities involve a certain fee. If this has not yet been included in the buyer’s final price, you will most likely be obliged to shoulder it.
Conduct a thorough background check.
This is one way to verify that the information you saw in the listing is accurate or at least close to what you found. If the seller indicated a high amount of website traffic in their listing, use SEO tools to check if it’s true. In this case, it will give you a clue if the business is lucrative and if their traffic is organically obtained.
Use reliable platforms to browse for SaaS businesses for sale.
To determine if the platform is legit, conduct a background check on this as well. Speak with respected people in your circle for feedback. Also, take note of red flags such as persistent questions regarding your credit card number and social security number.
3. Explore Concerns
If the seller’s team has the individual performance of the members documented, ask for the records. Also check the team’s overall performance in terms of productivity and success rate. Add more metrics to assess as you see fit.
In case the seller already has the long-term plan (at least one year) laid out, determine if they can execute it even after the turnover. If they are not certain, how are they planning to do this after the transfer? Determine their skills, areas to improve on, and how all these factors may affect the performance of the software.
Do they immediately answer their customers’ queries? If not, how long does it take before they attend to the issue?
This is one of the most important factors to consider when buying a SaaS business. After all, trends will come and go and you have to adjust to the changes to keep up with the demands of the industry.
Built-in security checks
The software and the business website are bound to ask for information from the customers that have been and will be onboarded. How will the team ensure that the data is safe? What are the security measures already laid in place to protect the information? How are the security measures maintained and assessed?
Potential to scale
If you eventually decide to purchase the SaaS business, can you make the necessary changes to accommodate more subscribers in the future? This is assuming that you can further expand your market audience reach and get more subscribers.
You’re not the only one who should be heavily considering this even before you close the deal. In this regard, ask the seller for detailed financial reports. While a lot of buyers may just breeze through the reports and accounting details, this is a key area for you to place great attention. If you don’t have the time or enough skills to understand the reports, you may consider hiring an accountant to do the job for you. Instruct them to take note of the small details as well.
If they have analytics for everything, request for a copy as well. The reports may include statistics of site traffic, past and present revenues, response rate for the social media and email campaigns, and number of subscribers for the free trials versus the paid subscriptions. The list can go on but don’t hesitate to request for the documentation because you may use this as future reference should you go on a deal with the buyer.
5. Consultation with the Experts
SaaS experts generally act as consultants in their respective SaaS fields. You can pay for their services so they can provide you with sound advice on how to grow your business. If you haven’t bought a SaaS business before, they can give you insights on how to pick the best company for you, based on their experience.
Aside from these, they can assist you with crucial processes of the business. Some of these processes include service and software development, marketing research, team training and hierarchy, advertisement and marketing, budgeting and other costing concerns, and customer onboarding. Most of these experts have their specialities. Your homework is to determine the best one in your field.
Ready to Buy a SaaS Business?
Consider everything when you’re buying SaaS business. It’s ideal to have a good working relationship with your seller. Yet, you need to make sure that you don’t take everything that the seller says at face value. After all, there’s still the possibility that they might forget some points about their SaaS business. To prevent this risk, make sure to check everything and cross-examine your findings. This way, you’ll know what areas to cover in the deal when you draft the contract and provide a counteroffer for the seller.