Top 5 data points that can make or break your SaaS acquisitionjuillet 31, 2022
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To sell your Software-as-a-Service (SaaS) startup at a price and terms that make you happy, you need data that convinces buyers that what you’re asking for is fair. Put yourself in the buyer’s shoes: What do they want? What motivates them? Only then will you know how to address their concerns.
Your most likely candidate is a financial buyer: Someone who sees your startup as an attractive investment over the medium to long term. Financial buyers compare asking prices to future earnings potential to determine whether it’s fair trade.
Factors potential buyers look at include: How easy will it be to scale your SaaS startup? Will they earn a return on investment (ROI) in three to five years? Ultimately, you are responsible for proving that your startup is an exceptional investment opportunity. And, in this, metrics matter.
No financial buyer worth their salt will take a chance on you unless you have the data to back up your claims. I mean cold, hard numbers like monthly recurring revenue (MRR), customer churn, acquisition costs, customer lifetime value, and more.
Before listing a SaaS startup on a marketplace like MicroAcquire, review the below data points. Otherwise, you might spend months with your hook in the water without any bites. Time kills all deals, so act now before it’s too late.
The data that influences buyer decisions
It doesn’t matter if it’s an individual or a highly-capitalized private equity firm — financial buyers care about one thing only: earning a return on their investment.
The sooner they earn that return, the better, so it’s reasonable to assume that your SaaS startup should be growing fast – at least for your sector – and point towards an exit opportunity in a few years. In most cases, buyers also want to see profits (historical and projected).
Opportunity is equally important – are there growth levers you’ve yet to pull? If you can convince the buyer you’re sitting on an untapped market, they are more likely to make you an offer. But that won’t mean much unless you can also prove the long-term resilience of your business.
You can and should make a convincing case for these high-level goals, but more importantly, back them up with data. Build your rationale from your data first and it becomes a solid foundation that buyers can’t shake.
1. Growth (revenue and profit)
When you consider growth alone, acquiring a SaaS startup is a lot like investing in a stock. The buyer expects the value of your business, which is usually a multiple of revenue or profit, to increase over time. Any pattern that supports this theory is a tick in the buyer’s box.
Annual recurring revenue (ARR)
Annual recurring revenue (ARR) is your annualized income from subscriptions. Naturally, your ARR should increase over time. Stagnant or declining ARR is a red flag (unless you’re about to win a large contract or new market). Buyers will likely ask for at least three years of data.
Monthly recurring revenue (MRR)
Monthly recurring revenue (MRR) is your monthly income from subscriptions. Like ARR, your MRR should also increase year over year. Fluctuating MRR might indicate seasonality, overdependence on marketing campaigns, or an issue with churn or your product.
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
Earnings before interest, taxes, depreciation, and amortization (EBITDA) indicates a startup’s profitability. It ignores the effects of financing and capital expenses to indicate profitable growth potential, especially in SaaS businesses.
Again, EBITDA should increase over time as you scale. Buyers also use EBITDA to compare SaaS companies of the same sector: A yardstick for your position in the market. Buyers are also likely to use EBITDA in their valuation of your company.
Here’s where the comparison between acquiring a SaaS company and investing in a stock ends. Buyers have a lot more influence over the returns of acquiring a SaaS startup than a stock market investment. Their expertise alone creates opportunities that you can help elicit.
Churn means different things depending on the context, but most commonly, it is the loss of revenue or customers, expressed as a percentage. The number of customers or total revenue lost in a given period are tallied, then divided by the customers or revenue at the start.
Although there’s no industry standard for reporting churn, most online resources claim an average of 3% to 8% for SaaS. Anything higher than 10% could indicate an underlying problem with your business, so expect buyers to question you about it.
Compare churn with other similarly sized startups in your sector. If you’re below the norm, you’ll reassure buyers of your customers’ loyalty as well as a quality product. High churn means a leaky ship – you’re spending more to replace lost revenue which is unsustainable in the long run.
Customer acquisition cost (CAC)
Customer acquisition cost (CAC) is the amount you spend to acquire a new customer. The lower this number, the better, since it implies your marketing is fertile ground. A low churn and CAC tells the buyer they can grow the business without too much extra work.
A high CAC, on the other hand, especially if your churn is also high, indicates that you might not have found product-market fit yet. While not a dealbreaker necessarily, it could mean a lot of work for the buyer. Consider waiting to list your SaaS startup until you reduce these numbers.
Customer lifetime value (CLV)
Customer lifetime value (CLV) is the revenue you expect to earn in a customer’s lifecycle (or time spent with your company). This number should be at least three times that of your CAC (a CLV to CAC ratio of 3:1) to indicate a healthy and resilient business.
Financial buyers will look at all three opportunity metrics (churn, CAC, and CLV) to evaluate your startup. Is it in good shape or does it need expert attention? Maybe you rely too much on paid ads, for example, and not enough on SEO or referrals.
Side note: Some financial buyers look for SaaS businesses with something missing. They then fill that gap to supercharge growth. You’ll command a better price if you’ve already done the hard work, but if you’re in a rush to sell your startup, consider presenting your weakness as an opportunity.
Are you a whale in a puddle or a guppie in the ocean? Most SaaS companies are somewhere in-between. Even if you’re the market leader in your sector, such a privileged position – and a head start for buyers – seldom lasts. Who’s waiting to beat down your customers’ doors?
Number and size of competitors
Competition is inescapable in business. Your unique selling points can, but don’t always, compensate for a saturated market. Someone might copy what you do and do it better. Buyers, therefore, want to know the size and number of your competitors to ready their defenses.
A saturated market might not be a problem if it’s large or growing at a rapid clip (such as ecommerce). On the other hand, a lack of competition might indicate that no one else thinks you’re doing something worthwhile. Either way, the data helps buyers infer potential returns.
Past acquisition data
If your buyer is a professional, such as a private-equity firm or venture capitalist, their market knowledge could put you at a disadvantage. Unless you know how much startups like yours typically sell for, your buyer might lowball you without you realizing it until it’s too late.
Refer to multiple reports such as those from acquisitions marketplaces like MicroAcquire, read valuation articles and case studies, and reach out to other founders. At what multiples do startups of your size and sector usually get acquired? That’s your yardstick for negotiations.
How do you prove the future longevity or persistence of your business? It’s not enough to show profit and revenue growth if you expect some outside influence to neuter your business model. Collect the following data to convince buyers that the good times are here to last.
Intellectual property (IP)
For a SaaS business, your intellectual property (IP) is everything. It’s the lifeblood of your business, what people pay you for every month or year. You must persuade buyers that you’ve future-proofed your IP with watertight patents and ownership rights.
If your intellectual property isn’t patented, how easy is it to copy? If your product is open-source, you need a rationale explaining why it won’t impact your business model. Similarly, have your contractors signed IP waivers for what they build on company time?
One thing the pandemic has made painfully clear is that trends – in this case, staying at home – don’t last forever. Netflix, Peloton, and the mighty Zoom are all losing momentum now that lockdown orders have lifted. What trends does your business enjoy and will they last?
Your customer support tickets reveal a plethora of data about your startup. They can indicate a buggy or immature product, operational inefficiencies, technological dependencies, poor messaging, and more. In other words, they’re a keen measure of how well you’re doing.
While certain tickets might be easy to solve – a bug, for example – others, such as a weak engineering team or misunderstanding of your target market, could be catastrophic. Buyers will want to review your customer support tickets, so ensure that you know what secrets they reveal.
How well have you positioned your startup to customers and stakeholders? Buyers are looking for your special sauce, the thing that customers love. What is it you do that delights customers? Do your messages attract a large audience? Are you delivering on your promises?
You can measure the strength, reach, and effectiveness of your brand in multiple ways. Ideally, you want to collect as much data as you can and summarize it in a report for potential buyers. I’ve included three important brand metrics below to kick things off.
How many mentions in industry or mainstream press have you won? Was this press positive, negative, or neutral? Articles about your startup or that mention your startup in a discussion of a relevant topic help prove that you’ve built legitimacy and credibility in the public eye.
How many of your prospects interact with your marketing campaigns? How does this compare with that of your competitors? This also measures your share of voice. In other words, how much attention your prospects give you over your competitors.
Your website traffic tells many different stories. Ideally, you want to demonstrate growth here as you do profit and revenue. Your bounce rate (the percentage of visitors that visit but don’t stay), on the other hand, should be low, as this indicates that you’ve nailed your messaging and user experience (UX).
In 2021, over 91 percent of customers read at least one online review before buying. The more positive reviews you attract, the higher the likelihood a prospect will buy from you. Buyers will want to see reviews, case studies, and testimonials to gauge your customers’ opinions.
Net promoter score (NPS)
Your net promoter score (NPS) measures how likely your customers are to recommend your product or services to other people. Not only does this reveal customer satisfaction, but also customer quality – are they loyal, engaged, and happy? Or fickle and frustrated?
Customers trust their family and friends over advertising, so an army of customer champions is worth its weight in gold. Social proof also saves buyers marketing dollars through word-of-mouth referrals. Keep your NPS above the SaaS average of 28 to wow potential buyers.
Buyers are naturally skeptical. The above is just a snapshot of the data you might share. Gather as much data as you can to substantiate your claims. Once your case is too persuasive to ignore, you might just sell your SaaS startup at the price and terms you want. Good luck.
Andrew Gazdecki is a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes, Wall Street Journal, and Entrepreneur Magazine, as well as prominent industry blogs such as Axios, TechCrunch and VentureBeat.
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