12 Tips for Buying a SaaS Company

In my life, I’ve raced a lot of cars and motorcycles.

I’ve broken a lot of bones (18 to date).

And I’ve also bought a lot of SaaS companies (nine and counting).

I clearly didn’t learn a lot from that second part, because I’m still racing cars and bikes. But I definitely learned a lot buying all those SaaS companies:

1. Where to Buy SaaS Companies

If you’ve never bought a SaaS business before, you probably don’t know where to start. It’s not like you’ll run into them on Craigslist.

Fortunately, there are a few really valuable resources I’ve used over time to check out potential new acquisitions:

• FE International
• Quiet Light Brokerage
• MicroAcquire
• Outbound

2. Start Out Small

Don’t try to make your first acquisition a big one.

For one thing, big companies will (normally) be a lot more expensive. Just as importantly, they’re also a lot harder to run.

Starting out small enables you to figure things out on a more manageable scale. And when you make mistakes – which you inevitably will– it’s far better to do it with a small company than a huge one, because they’ll be easier to correct.

3. Begin With the End in Mind

Presumably, your ultimate goal is to make money from buying a SaaS company. But there are lots of ways you might do that.

Are you going to buy cheap and flip it? Or buy it, grow it, and sell it in five years?

When you’re buying a business, it’s really easy to get carried away and think: “This is a good business. I think I can grow it.” But what are you actually going to do with it? Are you going to manage it forever? You need to get into the mindset of thinking where you want to go in five or 10 years’ time.

It’s really hard to do that for another person’s business, but you have to because you don’t want to get caught owning it indefinitely.

4. Do Technical, Financial & Marketing Due Diligence

It might not be the “sexiest” part of buying and selling SaaS companies, but there’s a bunch of due diligence that you absolutely need to carry out upfront. It’ll stop you from – or at least dramatically reduce your chances of – making bad decisions and burning a ton of money.

That due diligence fits into three broad categories:

Technical Due Diligence

There are several companies, developers, and services you can use to complete the technical part for you. Centurica is a good service to do all of these things, run by a good friend of mine, Chris Yates.

This stage is done after a letter of intent has been written up or a handshake deal has been agreed to. It’s where you dig into the back end of the business and figure out how everything actually functions.

Unless you’re a techie, you’ll want to hire an expert who knows the language of the company – whether that’s asp.net, Rails, JavaScript or anything else. We typically hire an expert on AngelList – a seasoned developer who can carry out the technical side of the due diligence in maybe 10 hours. They review the code. They look at where the inefficiencies are. They find out what’s wrong with it.

Next, we always try to have our dev team rebuild their own system and get them set up with whatever access they need to be able to do a soft deploy of nothing, just so they know how the system works – basically letting them practice for when they take control for real.

If you don’t do this, you could spend the next year trying to figure out how to take over the business and forget everything else.

Financial Due Diligence

If you’re buying a company that’s making under $1 million a year, you can probably hire an accountant to look into their finances. For anything greater than that, you probably want to have an expert. Your background is not in finance, and spending an extra thousand bucks at this stage can save you a lot of money on fraud.

The person you hire will be looking over the company’s P&L, trawling through their bank and credit card statements, and generally making sure everything is in clean working order.

If you find the company through a broker, they’ve usually done some degree of preparation for a sale, so their books should be in some kind of order.

If they’re not in order, you need to make it their responsibility to organize the books and cover the cost or time taken to do that.

Marketing Due Diligence

SaaS companies are very valuable. They’re profitable, and the cost of operations is fairly low. But make sure you’re not buying a mirage of value.

If the site doesn’t have any marketing value, if it’s not consistently growing, then it’s effectively shrinking – and you have to just be aware of that.

Let’s say they only generate 10 new trials or 10 new customers a month. Well guess what? You’re probably going to be buying a shrinking business. It’s going to be churning out more customers than it’s adding.

Now, I’m not saying you definitely shouldn’t buy that company. You can bring it back to life and make money, but you need to know that you’re buying a dying business and you’ll have to figure out what’s wrong with it. 

I usually try to hire an expert just to make sure we look at the SEO part. Have they paid for links before, or done anything stupid? Wayback Machine can be a good starting point for figuring out what they’ve done in the past.

Be sure to look at where the traffic is coming from. Early on, we bought a business and a lot of the traffic was coming from India and Asia. It was seeing a huge amount of organic growth, but all of that growth came from different countries.

I took a chance and figured we’d monetize all that traffic by optimizing the conversion rate. Well, the buying power of people from those countries where all the traffic was coming from wasn’t what we needed to be attracting. So we just had a whole bunch of traffic that was just not ever going to buy.

It’s a rookie mistake that you can easily make. So think about where the traffic’s coming from and what you’re going to do to grow it.

Just make sure you understand the business and anything that’s wrong with it. Those are things you can potentially use to negotiate a lower price or walk away from a deal.

5. Know When to Say “No”

Negotiating is one thing, but sometimes you’ll uncover a problem that simply isn’t worth your time. You’ll sink years of your life into those businesses and never come close to seeing a profit.

If there’s anything wrong with the code or the marketing, walk away. Remember: there’s a lot of SaaS businesses out there, and many of them are open to buyers. It’s much easier to find the right company, with potential, than it is to fix a big problem.

The reason I say that is: the last thing you want to do is buy a company and have a marketing hole. Because that company is now shrinking, and you’ve got less and less money to fix it. And all the time that you spend on fixing it takes away from what you really want to do, which is grow the business.

6. Build Your Team in Parallel With Your Due Diligence Process

Hiring exceptional talent – the real A-players you need to grow a business – is difficult, and it takes a bunch of time. So get a headstart on it by kicking off the process while your experts are doing all the due diligence, which usually takes 30 to 60 days.

Usually, at the point when we buy a company, we already have a developer lined up and all the necessary resources ready to deploy.

Anything you can do in parallel when buying a SaaS company is better, because it makes everything go faster when you eventually take the reins. And that means it’ll take you less time to grow.

7. Look at Your Competitors

You might find a SaaS business with a great product. But if 50 other businesses are offering that exact same product, you need to factor that into your decision-making.

We assess the competitor landscape to find out who’s doing what, and how they’re doing it. What features do they have? What features do customers like and expect to see?

As part of this process, we’ll interview customers of the company we’re buying. At the same time, we try to get in touch with customers of their rivals too, just to make sure we fully grasp every little thing about the marketplace and the expectations of our would-be audience.

Essentially, that gives us an understanding of what the heck we’re doing.

This whole stage is so important. Back in the day, we bought this company called Pick, which is a calendar scheduling tool. It’s a really great product, and at the time it was one of a bunch of companies competing in the same space as Calendly.

But over the years, it became a free feature that a lot of our competitors had. So it went from being a highly useful tool to something that 15 companies offered for free, which becomes very hard to market.

Had I known how things were going to turn out, I would have done something very different. I probably would have walked away from the deal.

8. Understand When to Walk Away

Which brings me nicely to the next point…

People think the hardest part about buying a company is going out and spending all that money – $100,000, $500,000, $1 million, whatever it may be.

Of course, money is finite and that’s hard. But what’s actually a whole lot worse is spending good time and good money on a bad deal or a bad business.

If you buy the wrong company, it’s better to walk away at a loss a year later, when you find out maybe this is not right for you. Not only do you have to think about the money that you’ve already spent – your sunk costs – but you also have to think about your potential for income going forward.

It’s incredible. A lot of founders we talk to, they’re making $50-70k from their business, and they’re badasses that could be making $200,000 if they just had a regular job. They’re trying to negotiate another $100,000 on the sale of their business, when they could go out and get a job tomorrow and get a way better salary.

So a lot of people don’t think about their salary when they think about buying or selling a SaaS company, but you absolutely should.

9. Learn How to Exit

Understanding when and how to pull the trigger and get out is probably the most valuable thing you can learn.

In the past, we’ve bought companies that we made money on just from buying at a good price. In fact, I know quite a few people who just buy for a steal of a deal and flip it. Their value doesn’t come from their ability to operate a company – they just buy it for a really good price, hold onto it for a few months, clean it up a little bit and sell it for a profit.

Finding a good deal comes with experience. It’s very hard to do – I couldn’t give you five specific things to do to find a good deal.

I have a friend who buys dental practices, so he’s in a completely different space to SaaS, but he just knows how to operate dental practices. He buys them with little upfront cash and he operates them, flips some, gives the seller equity in the business, and now he has 30 or so dental practices. So you just have to figure out your niche.

Just go out and find the business, then figure out how to operate. Don’t worry too much about the efficiencies that come later.

The other thing to note is that there’s a lot of loans you can get to support you. For instance, you can get SBA loans to buy a company, which means you can do things with very little cash upfront. 

Ultimately, what you do is use the revenue from the company to pay off the loan, which means you don’t really make money operating the business because you’re paying back the loan, but you also only put in 20% of the price. So if you had $400,000 to buy a company, you could technically buy a $2 million company.

But it’s really easy to say “I want to go raise money.” You’ve got to have a vision of what you want to do on the exit. How are you going to make money off this? And what is in it for you? 

If you’re not sure, a good buddy of mine runs Mac Lackey. He works with entrepreneurs who want to scale their business and enjoy freedom in their lives by improving efficiency or driving to a meaningful exit.

10. Make Sure It’s Process Oriented

One of the most important things to look at when considering buying a company is the way it’s run.

It’s easy to look at an attractive company and think “All I have to do is keep running it and enjoy the profits.” However, you need to look deeper.

Is the company dependent on the current team or founders for its continued success?

For instance, if you’re looking at buying a business that markets heavily off of a personality, such as “John the Marketing Expert,” are customers expecting to see and hear from John often?

When I buy SaaS companies, I look for a solid collection of Standard Operating Procedures (SOPs). An SOP is a clearly defined, easy to follow business process.

Do you need a rockstar to perform customer service? What is the process to fix bugs? Do all of the important aspects of the business have a clearly documented process, whether it’s written down or screen recorded on video?

This determines whether I can plug my own team in seamlessly without skipping a beat, or whether I have to reinvent the wheel, and potentially even the branding.

11. Use the Product

Get the business owner to grant you access to their service. Alternatively, do a little secret shopping of your own.

You want to see if the product delivers on the promises made in the marketing. Is it good quality? Is it easy to use? Does it work fast?

Are there any glaring problems with the service that make it less attractive than the competition?

This applies beyond the SaaS realm to ecommerce valuation, sales, and even productized services. Sometimes, bad products can still grow a company merely from a lack of market awareness or other options.

But as that market continues to become more sophisticated, poor products will be left behind. You don’t want to be stuck holding the bag by purchasing a company whose best days of growth are behind it.

Another reason to use the product yourself is that it gives you a lot of ideas for your strategy if you do buy the company.

Are there just a few minor flaws that you can eliminate and provide way more value to the market? Can you add a few extra features, keep pricing similar, and compete with whales in the space? If so, you could have a golden opportunity.

12. Compare Revenue with Profitability

I’m not a “profit purist” who says that profitability is the only thing that matters, revenue be damned. Yes, profit is the ultimate goal — we’re either planning on taking consistent profits or selling the business for profit at some point in the future.

But, revenue is a good sign of a business that knows how to generate sales. And when you have enough revenue, you can often find ways to cut expenses and increase profits that way. Revenue also provides cash flow. 

However, when looking to buy a SaaS company, I want to know that revenue and profits are in sync. In other words, I don’t like to see a huge jump in revenue in Q3 with a sharp drop in profits during that same time period.

The reason is, these companies are often valued based on a multiple of revenue. But it’s possible to inflate the numbers with flash sales, for instance.

If the company’s revenue for one month was triple what it usually would be, but profit went down, I want to see what kind of discounts and promotions they were offering. I want to look back at their marketing campaigns.

Because low-profit, high-revenue months are calculated into the multiple (selling price) just the same as high profit months.

What excites you most about buying your first SaaS business? And what are you hoping to achieve? Let me know in the comments below!