Building a SaaS Business You Can Sell

This is a guest post by Thomas Smale from FE International, a website brokerage with an emphasis on SaaS apps.

At FE International we speak to website owners on a daily basis who are looking to sell their businesses. Unfortunately, many of these businesses are not sellable for a number of very avoidable reasons. Planning your exit in advance (even if you have no intention of selling now) is always the sensible thing to do and will put you in good stead, saving you headaches when you do decide it’s time to move on.

SaaS products have always proven to be very popular with buyers over the years. Last year we sold 78 web-based businesses, so reflecting on these we’ve pooled together our collective experience to show you what really improves the saleability and the value of a SaaS business in the eyes of a new potential buyer. A combination of these factors could be the difference between selling for 1x EBITDA (if done badly) and 3x (if you follow these rules).

Choose your payment processor carefully
This is one of the most common issues we come across and can affect value significantly. With SaaS businesses the majority of revenue will be through monthly, quarterly or annual billing recurring payment plans. There are often hundreds if not thousands of subscribers paying through the year, usually processed by one payment platform.

A common problem sellers run in to is that when it comes to sell, the monthly subscribers cannot be transferred to a new owner – which is where the majority of business value lies and is an essential element of the sale. For instance, subscriptions in a Paypal account cannot be transferred and this requires a buyer either taking over the seller’s account (always a last resort and can be complex if the sale is international).

This can lead to complex transfer arrangements between buyer and seller which can be a deterrent for investors from the outset and is also an ongoing headache for both parties post sale as it will often involve contingency based financing agreements. To avoid this, opt for a transfer-friendly payment processor which will make the business universally appealing to buyers and save considerable effort post-transaction. Check with your merchant account or payment processor before signing up as they all have different policies depending on your location or history with them.

Future-proofing your software
Many SaaS business owners have developed their product themselves, usually to solve a problem they encountered personally or profit from a gap in the market they spotted. As the architect their technical knowledge of the source code is unrivalled, but it can present a problem when it comes to selling. How can a new owner upgrade or expand the software offering without the seller? This is a common issue and the best mitigation strategy is to source an affordable, reliable, independent third party to work on the product for 3-6 months before the sale.

Ensure they document everything they do in detail. This will assure the new owner that product developments can be carried out without the seller’s technical knowledge. It also opens up the potential buyer universe to non-software specialists, which is a considerable pool of demand for a business seller to tap in to.

Build and utilise the mailing list
Focus on building your email subscriber list and make the most of it (ideally through a scalable auto-responder sequence). Buyers are increasingly focused on email membership for SaaS businesses which they see as a first-step marketing strategy after a change of ownership.

For example, investors without much experience in the niche will likely initially focus on marketing to existing customers (always easier to sell to an existing client), so a responsive subscriber base is a strong business sale point. On the practical side, make sure you use a good provider (Mailchimp, Aweber etc.) and not a more complicated self-hosted solution that could put off buyers.

Depersonalise the service (mitigate key man risk)
This is a general point for many online businesses (particularly owner-run models) but is very relevant for SaaS sites. Make sure any personal branding you use for marketing or for the product itself is phased out prior to sale. Whilst a personal touch can help with humanising the marketing approach and selling services, it makes the transfer of ownership and ongoing operation more of a risk to new buyers who can’t continue the same approach and will likely affect sales price or mean you have to stay on for longer post-sale.

Guarantees to the new owner that they can market with your name aren’t worth near as much as a neutral product offering to begin with. Another solution would be to use a pseudonym to brand the product around and that way, the “owner” and his/her reputation would be far easier to transfer to a new owner.

Get on top of your data
Again this is a general point but in our years of brokerage experience, there is a direct correlation between the quality/quantity of information a seller has and the execution of a sale. In short, buyers like information and transparency. In SaaS, this is particularly acute given the number of subscribers involved and ongoing obligations to be transferred.

For example, in SaaS businesses, there are a number of key metrics that buyers expect to see, such as life-time value, churn, product breakdown split (assuming you have packages), conversion data and much more. There is no such thing as too much data when it comes to selling, and a good broker will help present these in a relevant manner.

Cultivate a quality affiliate network
Building out a solid affiliate network is commonly a sustainable way to build the profile of the product but more importantly it diversifies the marketing effort and revenue profile of the service. For investors, this is a big positive as it reduces the perceived overnight ‘acquired’ responsibility for direct sales and creates a ‘passive’ income stream for the service.

As a general rule of thumb, any passive income stream in an online business will attractive a premium valuation. However, do, of course ensure you partner with quality affiliates that will only enhance your profile and reputation of the service and try not to be reliant on any one affiliate. A general rule of thumb to achieve a top valuation would be to not have any one traffic source (or affiliate) driving more than 25% of sales.

Don’t discount without reason
A common strategy for sellers trying to maximise value before a sale is to bump revenue by pushing heavy discounts (or annual packages) in the months prior to listing. The unfortunate truth is that business valuations are almost always calculated off of normalised business performance so any last minute spikes in revenue will be significantly discounted by past performance and could even look dishonest.

Discounting the product in the run up to a sale may in fact have the adverse effect of weakening its value proposition in the market and thus perceived value to buyers.

Do a few things and do them well
Once the platform has been established, it’s usually the case that a SaaS business only has a finite amount of high ROI additions. Pursuing all of these opportunities exhaustively in the aim of an extra dollar is not always the best strategy. Focus on a few expansion strategies and do them well.

Trying to do everything might not improve profits (and thus the sale price) and more importantly might limit a new owner in terms of what they can ‘launch’ when taking over. A buyer likes to know that they can grow something, so leaving some future growth potential will benefit the sale price now.

Reaching Escape Velocity as a Bootstrapper

Escape Velocity

This article was a guest post by Bronson Taylor who is the host and co-founder of Growth Hacker TV, where the experts on startup growth reveal their secrets.

Escape velocity, in physics, is basically the speed needed to break free from gravity. The idea of escape velocity also surfaces in regard to startups; David Cummings says that, “For startups, escape velocity has to do with becoming the dominant vendor and growing indefinitely.”

I agree with David, if we are referring to VC backed startups, but bootstrappers have a very different notion of escape velocity. After almost 100 interviews on Growth Hacker TV, I have come to realize that a self-funded startup is not trying to reach a 10x return on a multi-million dollar investment.

Escape velocity for a bootstrapper might be freedom from the monthly bills, or freedom from a full-time job outside of their startup. Bootstrappers don’t need to escape from competition and become the “dominant vendor.” They require much less velocity because they are escaping a different kind of gravity.

This is an extremely important distinction because most of the growth advice online makes the assumption that everyone has venture capital. However, if you are self-funding your startup, here are four rules for reaching escape velocity as a bootstrapper:

  1. Linear can be celebrated

    VC companies need hockey stick growth. They need an inflection point where growth becomes exponential (or as close to it as possible) so that they can become the clear winner in their market. Linear growth, or heaven forbid, sporadic-up-and-down-non-uniform growth, is heavily frowned upon. Well, not when you’re a bootstrapper. Let’s say you have a bootstrapped SaaS product and you get 20 new customers in January, 10 in February, and 15 in March. Who cares? You now have 45 customers paying you every month. Does it really matter that the growth curve wasn’t beautiful enough to be displayed in the Museum of Modern Art? Ugly growth, as long as you are growing, can be celebrated as a bootstrapper.

  2. Channels can be smaller

    Since escape velocity for a bootstrapper might mean having a few thousand customers, not a million customers, then you can focus on growth channels that have a much lower ceiling. For instance, if you discover that buying tweets from BuySellAds.com has a positive ROI, then you can keep buying tweets and adding new customers five at a time. VC backed startups would laugh at the the unscalable nature of this strategy. However, “unscalable” is in the eye of the beholder. Buying tweets (as just a random example) may scale to exactly the size you need it to. Don’t let someone else define what scalable means for your startup.

  3. Acquisition can be manual

    Anything that isn’t automated, in terms of customer acquisition, is ignored when you’re trying to dominate a large market. You can’t do manual things and expect to grow enough to impress investors, but if you’re a bootstrapper then manual growth is perfectly acceptable. It’s possible to wake up everyday, as the founder of a bootstrapped startup, and manually email possible customers one-by-one, and actually acquire enough new customers over the course of a few months to reach your goals. Don’t get me wrong, I love automation as much as the next guy, but it doesn’t mean that manual processes don’t have a place in a bootstrapped startup when they are necessary.

  4. Retention can be relational

    Since a bootstrapped startup is dealing with much smaller numbers of customers then you have an advantage. You can treat them as your friends, and retain them through proactive relational bonds. If you only have 500 customers then you can easily find your power users and send them a personal note, thanking them for being awesome. You can easily find the people that haven’t used your product in a while (and might cancel, or stop buying from you altogether), and you can send them an email asking if they need help with anything.

As a bootstrapper you are playing by a different set of growth rules. Don’t let the “best-practices” of other startups arbitrarily limit you. By chasing hockey stick growth via automated high-growth channels, you might miss the boring, but gravity defying, methods that you do have at your disposal.

Growth Hacking Without Venture Capital

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This article is a guest post from Bronson Taylor. Bronson is a co-founder and host of Growth Hacker TV, the only educational platform focused exclusively on helping startups grow by acquiring, retaining, and monetizing users. They have over 60 episodes, with guests from Twitter, Facebook, LinkedIn, DropBox, and many more. Image above from Toban Black.

Founders sometimes assume that they need an influx of cash to truly grow a product. Luckily, this isn’t true. The confusion arises because we fail to make a distinction between the growth strategies that are relevant to venture backed startups as opposed to the strategies that are relevant to bootstrapped startups. These strategies overlap, but the differences are immense.

You can grow without money, but only if you stop imitating the startups that have closed a round of financing. As the host of Growth Hacker TV I have become keenly aware of these two parallel worlds, and this article is my attempt to outline the primary ways to think about growth when you are building a product without investment capital. There are plenty of blog posts for the funded so let’s even the score a bit.

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How I Grew My Startup’s Revenue 50% And Saved $60k Through Partnerships

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Photo by b1ue5ky

This article is a guest post from Eric Tarn. Eric is a co-founder of Onepager, a simple website builder which helps individuals and small businesses get beautiful sites up quickly and easily.

When you’re part of a startup, you’re usually working with a smaller team and budget to reach big goals. While it’s tempting to try to do it all by yourself (after all, isn’t that the go-getter startup way?) there may come a time when it’s most beneficial to work with another company to reach your goals.

It’s very likely that another company has developed a product or solution that you don’t have time to, and vice versa. Like the symbiosis between egrets and hippos, partnerships allow two parties to mutually benefit from each other’s work.

At Onepager, we’ve formed two very different partnerships. In our first, we incorporated fellow startup Gumroad’s e-commerce platform into our own; in the second, domain registrar Namecheap.com offered our services to their huge user base. In both cases, the other companies approached us with an initial proposal.

While luck is always part of business, I also think that by communicating our values honestly, both internally and externally, we attracted like-minded companies who were natural partnership fits. And throughout both negotiations, we made sure we were crystal clear on how the partnership would benefit each side.

Here’s how I’ve found working with both a small and large company beneficial to my own, and the reasons why any startup should be open to the idea.

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“Finding Your Flywheel” – My Talk from MicroConf 2012

Case Study: 13 Pre-Launch Traffic Strategies for Startups (Part 3 of 3)

This article is a guest post by Dan Norris, founder of Informly.

In this 3 part series I’m running through 13 pre-launch traffic strategies (actually it’s turned into 14) I am using for getting attention and building an audience and a list for my reporting app Informly.

In part 1, I went into detail about my onsite content strategy which forms the backbone for my traffic generation efforts.

In part 2, I went through 6 more strategies including forums, guest blogging, email newsletters, CSS galleries, partners and app comparison sites.

In this final installment I am going through my final 7 strategies.

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Case Study: 13 Pre-Launch Traffic Strategies for Startups (Part 2 of 3)

This article is a guest post by Dan Norris, founder of Informly.

In this 3 part series (part 1 here) I’m running through 13 pre-launch traffic strategies I am using for getting attention and building an audience and a list for my web app Informly. In part 1, I went into detail about my onsite content strategy which forms the backbone for my traffic generation efforts. In this part 2 I’m going through 6 more strategies.

2. Forums

I’ve always been fairly active in forums frequented by my target audience (generally tech savvy small business owners). Rather than going into a lot of forums and posting an intro thread, I tend to build up a decent presence in only a few forums.

Once you’ve built your chops, you’ll get support from other members, leniency from the forum moderators and additional benefits (like links in your signature).

I have a weekly task to spend an hour going through and either answering people’s questions or posting original content to forums I participate in. The latter seems to work better for me because a lot of people hang out in forums to answer people’s questions, not a lot take the time to produce well thought out original content for a forum. I also make sure I’ve got a compelling call to action in my signature and it links to my site via a trackable link.

Here’s an example of a thread where I’ve posted some original content. You can see from the replies that people appreciated it, thanked me, some even signed up to test the app.

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Case Study: 13 Pre-Launch Traffic Strategies for Startups (Part 1 of 3)

This article is a guest post by Dan Norris, founder of Informly.

Part 1 (of 3) – Introduction and Onsite Content
Experienced entrepreneurs will tell you that no traffic is free. Even if you aren’t paying money for something you are paying in time (which is worth something) and once you try to scale it, you will have to part with cash.

But sometimes they forget what it’s like when you get started. The reality for most bootstrapped web startups is that you have time – but you don’t have money. And even if you did, it’s often very hard to make paid traffic like Google AdWords work.

To get the momentum going we have to rely more often than not on a bunch of free strategies.

My web app, Informly is a simple live dashboard that reports on your business performance showing charts from a number of services (MailChimp, Analytics etc). I’ll be launching it in a few weeks and over the last few months I’ve been working on a bunch of traffic strategies designed to build interest, develop an audience and launch with a decent pre-launch mailing list.

Over the course of 3 articles I’ll present 13 free traffic strategies that I am using to drive traffic to my site pre-launch. I’ll also include specific information on visits, opt ins, conversion rates etc where possible and what worked and what didn’t.

In this part (part 1) I’ll be addressing onsite content which is by far the most important part of my traffic strategy.

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Tell Everyone Your Startup Idea

Idea

This artice is a guest post from Joel Gascoigne. Joel is is the founder of Buffer, a smarter way to share great articles with friends and followers. He Tweets at @joelgascoigne and writes regularly on his blog about startups, life, learning and happiness.

I was speaking at an event last week about the lessons I’ve learned along my startup journey, mostly focused on my recent experience of founding and growing Buffer. The first lesson I talked about was how being open with your ideas, and vocal about sharing progress can put you in a much greater position over time because you gradually grow a following and audience to use as a launchpad for future ideas.

After I finished my talk, someone in the audience asked a fantastic question, a concern they had which I think many aspiring startup founders have too: when being open and vocal about your idea in the early stages, isn’t there a danger someone will take the idea and run with it, and kill your startup in the process?

I want to share my personal experience of competition and talk about three specific reasons I now believe keeping your idea quiet could actually be hindering progress to success in a large way.

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ISVcon is Almost Here, the Terror of Starting Something New, Talking to Customers, and more…

ISVcon in Reno July 13-15 – Let’s hang in Reno in a couple weeks! Probably my last speaking gig of the season.

Find Joy in the Terror of Starting Something New - The terror of firsts is alive and well. We’re all scared of doing something for the first time. You have to get over it and do it anyway.

Talking to Customers: What a Concept – Cool post by Startup Success’s Pat Foley on how to start talking to customers before you build your product.

Fix the U.S. Patent System – via @spolsky, “The EFF’s new position on software patents is very good; if these rules were adopted, it will eliminate patent trolls.”

From programming to business: Lesson 0 – Some good takeaways: don’t ignore sales and marketing, business is about people, and you can’t be good at everything.