Acquiring SaaS Business
19 Feb 2019 • Strategy & Business Design
Building your own SaaS business is often exciting, but stressful. If you have the equity and you want to dig straight in, acquiring SaaS business is one of the options you have on the table. In this post I try to break down how you should evaluate your portfolio of software companies you are about to acquire. Finding that portfolio is a totally different story so we won’t dig into that this time. Instead, let’s try to find a winning formula for the time consuming and costly due diligence.
First, you should get your eyes to churn rates. SME and Enterprise level organizations usually have different variations in their churn numbers – bare that in mind when executing a study. Use common sense if you see churn rates that are less than 20%. 1/5 paying subscriptions gone out of the window is a big loss in any SaaS business.
Second, CLV. Customer lifetime value should give perspective on the question does this company have opportunities to grow and evolve.
Third, CAT. Cost of Acquiring a Customer tells you nicely what sort of growth engine is needed.
Most of us who have been working with SaaS business have seen some copy and paste solutions. You do not want to buy a SaaS without checking the source code and having an expert look at it. What you want to learn from the code is its readability, how well it’s documented, what sort of frameworks there are in use, what is the life cycle of those frameworks and if there are end of life components in use etc. In other words, you want to know how well it’s designed and engineered. If you aren’t that much of a technical person, you often need a technical maestro on this task (give me a call).
In my experience some SaaS businesses have protected their IP rights far better than others. For this reason, you need to find out the level of your future Intellectual Property rights. This means going through subcontracts and interviewing developers. This is a highly important task as you don’t want to end up with a lawsuit for breaching or using someone else’s technology in your domain without them agreeing to it.
In my opinion, regardless of the field of your business, you should always look at this as an important function. Key metrics in customer support are usually easier to find e.g. Time to Response or NPS. I personally try to find time to go through tickets and sense the vibe from the replies the paying customers and agents are giving. This way I can better understand the quality of the product and learn if the customers are passionate about the product or not.
Acquiring SaaS business – remember to enjoy !
Like with any business ownership transactions there is a need for proper due diligence process when acquiring a SaaS business but to shorten that and save you tons of money I hope you find this post useful. Need help? Hit me a message!