Selling your online business is a serious decision for any owner and the process of seeing a sale through to completion can be intimidating for first-time and experienced sellers alike. Hiring an M&A advisor is a good step in helping to ease the effort but as with any major endeavor, it pays to be well prepared from the outset. Having successfully sold over 1,000 online businesses, we’ve put together some guidance on how SaaS entrepreneurs should best prepare to sell their businesses.
Know Your Numbers
Understanding the financials of your online business from the outset is vital to the successful sale of your business. Before you initiate a sale process you should be clear on every aspect of your business including all sources of revenue, cost(s) of sales and operating expenses. You need to be able to compile an accurate profit and loss statement for your online business as this will form the basis of prospective buyers’ valuation methodology and due diligence. Your business’ valuation will be calculated after reviewing various factors specific to your type of business.
Here are some things to think about. Note that some of the following may not be relevant to your business:
- Sources of revenue – Annual recurring revenues, AdSense, Affiliate programs, Direct ads, Direct sales, Monthly recurring revenues, etc.
- Cost of sales – Advertising & promotion, COGS, Credit card processing fees, Outside services, Shipping & delivery, etc.
- Operating expenses – Content creation, Employees, Hosting, Outsourcing, Subscriptions, etc.
- Track your core SaaS metrics – Using tools like BareMetrics, ProfitWell or ChartMogul you can track key stats like Churn, Activation Rate, MRR, CLV etc.
As part of the above, you should look to collate all the financial and supporting documentation to prove the financial performance of your online business. Not only will this verify the numbers you provide at the outset but FE International will audit the financials and this will be the starting point for the buyer’s due diligence process. As part of the preparation for sale, pull these files together in one place. You will want to gather monthly bank statements, credit card statements, merchant processor statements and monthly invoices.
Another essential part of the documentation process is standard operating procedures (SOPs). These are good general business practices and will be helpful in assisting a new owner to operate your business post-transaction. Help the new owner(s) of your business get acquainted by providing them with detailed SOPs. To do so, you will want to review and modify your already existing SOPs and create new ones as needed. Chances are, as your business has grown, new processes were added and you may not have gotten around to writing detailed guides for all of these yet. Now is a good time to write them.
Documenting your codebase is another important stage of your preparation to sell your business. Ensure your codebase is legible enough for a new owner to work with. This can be daunting for many SaaS owners who may not have properly documented their code from day one. Avoid this by making sure your developers properly document their code as they build out your product. That can help prevent issues during the buyer’s due diligence.
In addition to verifying all is in order with your codebase, you will want to look into your intellectual property and make sure it is secure. Even if you’ve hired additional staff or contractors to assist with the development, you want to confirm you own the intellectual property. For instance, if you have worked with contracting developers, you’ll want to have intellectual property assignments that note that you are the owner of the intellectual property. Additionally, staff contracts should note that the intellectual property is yours. If you have employees willing to transfer and work for the new owner of your online business, this is a plus. Potential buyers will be pleased with this arrangement as it will help them and their staff get up to speed and reduce risk associated with the transfer process.
Security and Compliance
Security is more important than ever. An Accenture/Ponemon Institute study reported that a majority (68%) of business leaders believe their cybersecurity risks are on the rise. Because of this, security and compliance will likely be top of mind for potential buyers. Knowing you are focused on security will leave potential buyers with one less thing to worry about. They will be interested to learn what steps you are taking to protect your customers’ information. Not doing so could lead to complications during the due diligence process and potentially result in a deal falling through. By putting security and compliance measures in place, this could easily be avoided.
Know Your Reason for Selling
One of the most important pieces of information for any transaction process is the seller’s reason for selling. It’s one of the first questions a buyer will ask, so you need to be able to articulate your motivation behind a sale. Your answer should to be honest and, ideally, should not express any urgency. Buyers expect to hear reasons such as selling to move into another niche, financing an offline endeavor or paying down debt etc. Red flags are raised if the sale rationale seems ambiguous, unsure or connected to the underlying performance of the online business.
The Value of Your Business
We’ve briefly touched on valuations, however, when preparing for a sale, it is important to understand how your business valuation will be calculated. At FE International we value and advise on the sale of internet businesses with a wide range of monetization strategies across almost every niche. Below we discuss how we value SaaS businesses and offer suggestions for further reading.
Valuations of SaaS Businesses
When it comes to SaaS business valuations, most businesses under the $5 million valuation mark are valued using a multiple of seller discretionary earnings (SDE), also called seller discretionary cash flow. This is particularly the case if the business is relatively slow-growing and does not have a management team in place.
SDE is the profit left to the business owner once all costs of goods sold and critical (i.e. non-discretionary) operating expenses have been deducted from the gross income. Crucially, any owner salary/dividends can be added back to the profit number, too.
Most SaaS businesses are valued within a multiple range of 4x to 10x. For businesses with revenues below $2 million, the typical range is 4x to 6x and for businesses with revenues over $2 million, the typical range is 6x to 10x.
There are numerous factors that contribute to valuation multiples. These include the age of the business, the owner’s involvement in the business, growth trends, churn and other SaaS metrics.
For more information on SaaS valuations including a more comprehensive discussion of factors that influence what these types of businesses are worth, read our article “SaaS Valuations: How to Value a SaaS Business in 2021.”
Run the Business
Don’t forget to run the business – the sales process usually takes several weeks by which time you will likely have another reportable period of numbers. Time and again buyers ask for these during marketing or due diligence and it’s a far superior message to report stable or improved numbers than ones that have slumped from seller neglect. It’s an unfortunate fact that a good month of numbers won’t improve the sale price but a bad month will open the door for renegotiation.
Integrity is Important
The common thread running through all of these steps is credibility. If you want buyers to move forward, you must show respect by being open, honest and accurate about all things, both good and bad. This starts with the information that is shared to summarize your business and is imperative with all documentation and dialogue exchanged and will be critical in due diligence through closing.
Misrepresentations and conflicting statements will always be found out (we’ve never seen it otherwise) so it’s best to be completely open and honest from the outset.