What to Do before Selling Your SaaS Business

Are you thinking of selling your software as a service (SaaS) business? Remember, buyers most often buy SaaS businesses for financial or tactical reasons. Know what they want in an acquisition, and you will be in a better position to undergo the entire process without much difficulty.

Establish the Value of Your SaaS Business

It doesn’t matter if you are selling a SaaS business or a website; you need to find out the best price to sell your business. To know what you may receive in the market, you need to get a valuation of your SaaS business to be aware of what it’s worth. After that, start setting up your company’s prospectus, including the facts, figures, and numbers. Typically, this is done by computing the annual revenue generated by your SaaS business and doubling up that amount. Also, factor in the amount you’ll compensate the broker or marketplace you use to sell your SaaS business.

Put Your Books in Order

Recurring proceeds is one of the highest draws to a SaaS business. Nevertheless, a growing business, in terms of increasing revenue generation, doesn’t guarantee that buyers will pounce on your deal.  Potential buyers are often not much intrigued by ‘what meets the eye’. Meaning, they would be more interested in finding out the fraction of your earnings that are actually profit. For this reason, you need to compute costs, such as costs of acquiring customers, your rate of churn, your average growth rate, and more.

To put your books in order, you need to think about maximizing profits and minimizing expenses. Usually, it’s less costly to retain, serve, get existing clients to subscribe and renew than trying to attract new customers to swap the cash flow. Additionally, upgrade your systems time and again to help you lessen cancellations. One thoughtful way of minimizing costs is cutting down human assistance. Use tutorials, videos, and knowledge bases to reduce the need for interaction between humans.

Debug Your Source Code

It doesn’t matter your finances are in good shape. If your source code is disordered, jumbled up or missing in documentation, potential buyers will be a bit skeptical about your business. In essence, your SaaS business source code ought to be clean, annotated, tested, and verified. It can be overwhelmingly difficult to sell your SaaS business if the source code doesn’t comply with the set standards and guidelines.

As well, a non-reliable, non-concise, overly complicated code can present you challenges as far selling SaaS businesses is concerned. Being the business proprietor, you need to be familiar with all the entries and exits of your source code. For a reason, it will present fewer challenges to the buyer; in case they want to alter or upgrade the software. Aside from that, a well-documented source code lets the seller takeover your business naturally.

Assess if You Need External Assistance to Sell Your SaaS Business

Note that, a reliable online business broker can help you get a valuation of your SaaS business. This is necessary so you are clear about what your business is worth. The good thing, you won’t need to meet your preferred business broker physically. Schedule time to chat with a reliable online business broker (website to advertise) to identify appropriate buyers. Of course, you need to have completed the valuation and prospectus before you start looking for buyers.

An extensively experienced online business broker can help you prepare and move you through the entire process of selling your SaaS company. More importantly, letting an expert online business broker negotiate the price with prospective customers on your behalf removes you from the equation. As a result, it eases the discomfort you might have when it comes to the actual transaction.


Top 3 questions to ask a business broker in 2019 to sell a business

Business owners often make huge mistakes by attempting to sell their business on their own when not prepared to do so. What’s worse? Choosing the wrong business broker to sell your business because you weren’t prepped to ask her the right questions. Here are our top three questions to ask a business broker before selling your business in 2019:

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1) How many businesses have you sold as a lead broker on the sale?

Resumes mean little, completed transactions mean everything. Get a list of completed transactions the broker has led in your industry, in your area, in your approximate deal size… everything.

2) Who is my potential target buyer?

Make sure the broker has a good plan for selling your business, and a reliable list of active buyers she plans to market the business to. Will she market individual buyers? Investment groups? Strategic competitors in your industry who might be actively looking for acquisitions?

3) Do you co-broker?

This is a big one business owners often miss when hiring a business broker. If a business broker will not agree to co-broker you might want to run for the proverbial hills as a potential seller looking to maximize interest, and offers within a limited amount of time. A broker who refuses to co-broker (work with and share commission) with with another professional representing a buyer who might be interested in your business is essentially limiting your selling opportunities in order to protect their own commission. We believe business brokers have a clear fiduciary responsibility to maximize interest, offers and speed on behalf of their seller clients, to ensure the highest price and best terms for any business owner who has entrusted them to sell their business.

Tips for negotiating a term sheet in 2019

A term sheet is a non-binding agreement outlining the basic terms and conditions under which an investment will be made. The term sheet acts as an outline for the parties involved so that once an agreement has been reached, a contract will be formed that adheres to the conditions defined in the term sheet.

A term sheet covers the major aspects of a deal, reducing the chances of a misunderstanding between parties. It also ensures that expensive legal fees attributed to drafting a binding agreement are not prematurely paid due to disagreements that arise. Here are some tips on creating an effective term sheet.

Numbers, Control, & Equity

The term sheet generally covers economic terms such as valuation and equity distributions to mitigate against a down-round or share dilution later. Things such as options or other equity incentives may be up for negotiation, as changes in options tend to change on a pre or post money basis. It also covers matters pertaining to control and voting rights, as investors enjoy having influence over managerial decisions as a way to control their investment and future liquidation options.

It Goes Beyond Valuations

It is easy to focus all attention on the pre-money valuation in a term sheet, as that defines the financing strategy of the startup moving forward. However, other topics such as governance and control should be equally considered. Investors can put in clauses giving them preference for the sale of a company or the issuance of preferred stock, giving them greater leverage over their investment and control over the company’s major decisions.

Retrofit Your Term Sheet

Not every deal or investor will be the same, which is why it important to draft a term sheet that answers to your specific needs, as well as those of the other party. Terms sheets are marginal, meaning that a win for you may mean a loss for the other party, vice versa. Hence, it is important to make sure that (1) you are aware and content with the terms laid out in your term sheet and (2) you leave room for changes or negotiation, as the term sheet is not the final contract, but a starting ground for securing your investment.

Why you need seller financing to buy your next business

If your broker is telling you that seller financing isn’t an option to buy an existing business that you like, I recommend you test that with the seller of the business personally.

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What is seller financing?

It’s when the seller of a business acts as your bank. More often than not, when somebody is selling their business, they expect to lend you up to 50% of the business value in the form of a note, carrying interest and being paid off through the cash-flows of the business over a period of five to seven years after the purchase of the business.

In his blog, business broker guru Richard Parker explains:

While the terms can vary including interest rates, length and percentage of the total deal being financed, a general rule is for the seller to carry thirty to fifty percent at current interest rates plus a few percentage points over three to seven years.

The dilemma for many buyers however is never getting to the point of presenting sellers with an offer because they are often stonewalled by brokers or the seller’s legal/financial representative, or family members trying to dissuade them from carrying a note.

I can certainly understand a seller’s trepidation, but the reality is that if they truly want to sell their business, they have to participate in the financing. End of story. Otherwise, their business will be another one that remains on the market forever.

Richard Parker, author of How to Buy a Good Business at a Great Price 

How common is seller financing?

Most sellers start out cold on the idea of seller financing because of the risk involved for them when it comes to the buyer actually paying them back for the loan, but it’s a great move for everybody involved when you consider the fact that this tool helps the seller attract potential buyers, and may even help the seller achieve a higher final price for his or her business. Seller financing can also help lead to a faster closing, which increases the probability of a transaction successfully closing.

Why 2019 might be the best time in history to buy a new business

As we mentioned elsewhere, 2019 looks like it might shake out to be the best year in a decade to buy a business in the United States. There are a few big reasons for this:

So if you’re considering a jump into entrepreneurship, -buying an existing small business is absolutely an option you should consider. In his article for business.comLooking Ahead: Buying a Business in 2017, Bruce Hakutizwi states:

Depending on your business strategy, industry, location, and other factors, there are more reliable and willing funding opportunities available to entrepreneurs right now than ever before. Between low-interest traditional business loans, government grants and loans, and a striking volume of venture capital available from individual angel investors, large corporations, and established VC funds, it’s easier and faster than ever before to fund a promising new startup or the expansion of an existing business.

As opposed to the relative risk of a brand new startup, obtaining funds to purchase an already established and successful business is even easier. This is doubly true if you’re purchasing another business that naturally extends or expands your own existing company or expertise since you can likely prove to the lender you’re up to the task of making the acquisition profitable. -Bruce Hakutizwi.

Buying a new business can be an exciting, rewarding and potentially life-changing experience for you and your family. Do your research before you choose any professional to help you with the process, and make sure you’re clear on expectations and compensation from the outset. And as always, we recommend you check the BizNexus Marketplace to help vet financial services professionals, and for any helpful reviews, ratings or relevant content to help guide your way.

A few useful links if you’d like to dig deeper on the topic:

  1. Buying Existing Businesses. -SBA

  2. How to Buy an Existing Website: A Step-byStep Guide. -Will Lipovsky

  3. How to Find a Business Broker. -Entrepreneur

How to choose the right business broker to help you buy a new business in 2019

An often overlooked option to help begin the journey towards buying your own business is to simply reach out to a business broker for guidance before you begin your search. If you can identify a quality business broker, which isn’t easy, this can be a way to help jumpstart your search and increase the chances of finding a successful acquisition. Brokers typically represent multiple deals within their category of expertise simultaneously, and if you’re able to establish a relationship with a productive broker you gain access to a continuous stream of deal-flow. The trick is to identify that unicorn broker.. The one who’s knowledgeable, productive, and won’t waste your time pitching you subpar, low probability deals for sale.

Speak directly with recent references.

Don’t even bother with a business broker if you can’t verify if they’ve historically done well by their clients on both the “buy” and “sell” sides of the transaction. Ask to speak with owners of businesses the professional recently helped buy or sell, and check for relevant reviews online. If you’re researching the professional’s profile online on his or her company site, LinkedIn, or Biznexus definitely prioritize DEAL experience over education, listed skills, or any other potentially biased information manufactured by the professional him or herself.

Make sure the professional keeps working for you.

Set communication expectations from the outset. A business broker is typically working with multiple buyers and sellers of businesses at one time, and communication can slip through the cracks. Set up a recurring weekly, or monthly meeting with the broker to review his or her listed deals. Even better, as you develop your relationship with the broker over the course of regular calls you position yourself in the front of the line to hear about the deals the broker may be working on, but hasn’t officially listed… Getting first crack at an unlisted deal is a great way to get a head-start on developing a relationship with the seller, and to potentially avoid a bidding war with competing buyers if you can negotiate terms before the competition gets wind.

Buying a business can be a very long, tough process, and having the right business broker there to help feed you potential deals, offer guidance and insight into market conditions can be a great help. Do your homework before your choose any professional to help you with the process, and make sure you’re clear on expectations and compensation from the outset. Standard shameless plug: We recommend you check the BizNexus directory before making contact with a potential business broker for any helpful reviews, ratings or content that could provide guidance.

A few useful links if you’d like to dig deeper on the topic:

  1. What you Should Know About Working with a Business Broker. -Inc.

  2. How to Find a Business Broker. -Entrepreneur

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Large Majority of Small Business Owners Completely Unprepared to Sell a Business in 2019

A recent article in Globe & Mail details the fact that the majority of small business owners who are ready to sell their businesses in 2019 are completely unprepared to do so. With SO many other business owners out there planning to close up shop and sell their businesses for a nice exit in a baby-boomer filled market, the statistics are mind-boggling considering we’re talking about the transaction of a lifetime, -literally. The author, Matthew Halliday states:

““Between 2012 and 2018, the number of businesses who just planned to close outright, rather than sell, tripled, from five per cent to 15 per cent,” says Corinne Pohlmann, senior vice-president of national affairs at CFIB. “What worries us is that they’re not finding buyers, and then their only option may be to shut down.”

Additionally, most entrepreneurs tend to put their businesses on the market long before they are ready – for example, without first bolstering lacklustre financial statements or securing relationships with long-time clients in writing. Few have formal succession plans, Ms. Pohlmann says, and many also tend to let their revenue slip in the years before a sale.

So, in that field of under-prepared businesses, it can be easier to stand out if an entrepreneur has the patience to proceed with the months – or years – of preparation needed beforehand.

The article emphasizes the importance building the right team FAR in advance of the moment you’re actually hoping to sell. Preparation is key here…. If you do your research in advance, and start identifying buyers early on in the process, you stand a MUCH better chance of being able to play multiple bids against each other when the time comes to sell.

Takeaway lesson? Put together your business exit dream team early on in the process, and let them keep the ball rolling and keep you from getting distracted with day-to-day operations of your business.

To get matched with intermediaries that fit your geography, business, deal size and more, head over to BizNexus and get your top three suggested intermediaries today, for free.