When should you sell your B2B SaaS?
Deciding when to sell your B2B SaaS company is a critical decision. This article will provide guidance on determining the right time to sell your business - and here is the TLDR:
Sell your business:
At it's most valuable
To whomever pays the most
At the top of the market
See? Easy! ;)
Who pays the most? Why?
To maximize the proceeds from selling your SaaS business, it's essential to understand the hierarchy of potential buyers and their capacity to pay. From lowest to highest, the categories of buyers are:
Search funds & individuals
Small and medium-sized PE funds acquiring your firm as a standalone asset
Larger PE funds purchasing your company as a tuck-in to a larger platform
Large strategics/Fortune 500 companies
As you go up this value ladder, a lot of different factors increase that explain why the higher level buyers pay more:
Existing customer relationships
Complimentary Products to cross sell into
A fully developed sales organization
A well oiled marketing machine
Cash to spend
Brand
etc, etc
Conversely, lower on the value ladder you find that the buyer often have little or no additional advantage compared to yourself. They may even have less advantage than you do - after all you’ve been running this business for years and understand your customers deeply. All this explains why eg Search Funds and individuals pay such low multiples.
This is also why it is critical to find an M&A advisor who can help you identify to whom your company would be the most valuable and get you in front of those people. Like we often say, don’t settle for the buyers in your inbox!
Ok, now you know who pays the most. Let's look at what makes a SaaS more or less valuable..
What determines the multiple I can get for my B2B SaaS business?
The value of a SaaS business is primarily determined by four factors:
Growth: High growth rates are the most significant value driver, assuming at least breakeven financials.
Profit: Higher profitability is preferred, but breakeven is acceptable if growth is present.
Annual Recurring Revenue (ARR): Larger businesses typically command higher multiples due to reduced risk and potential for greater profits.
Churn: Low customer churn rates are crucial. If your overall churn is high, consider segmenting your customer base to highlight stickier segments (e.g., older or larger clients).
We often get asked what’s an acceptable growth rate or how founders should think about trading off growth vs profit, and unfortunately the answer is that it kinda depends and the best thing to do is to get in touch and we can chat about your specific situation.
That being said - below 20% annual, year over year growth rate is where things start to get a bit dicey. See below as to how this should impact your decision on when to sell.
Okay, now you know what makes SaaS valuable and who pays the most. Let's look at market timing..
The top of the market is a mirage
Okay so story time:
2021 was an amazing year for SaaS exits! Things were selling for record multiples and everyone was happy
Then 2022 happened. You all know - Putin's invasion of Ukraine, inflation, lay offs, cuts, etc. Things were legit terrible. Lots of uncertainty, deals falling apart left and right, offers getting pulled or retraded, etc, etc.
Absolutely brutal time to be in the market
So: better to have sold in 2021 right? Hit that top of the market?
Not so fast..
Consider the following scenarios:
Scenario A: You had a $5m ARR business in 2021 and sold for 7x ARR.
Scenario B: You had a $5m ARR business in 2022 and sold for only 5x ARR, despite the metrics being identical to Scenario A.
Which would you prefer? Scenario A or Scenario B??
Seems like a trick question, but the reality is that you'd probably be better off with the 5x offer in 2022.
The reason is - most founders don't spend all the cash they get immediately. Most of the time, after having spent on a new house and a car or whatever, they end up putting the rest of the money in the public markets. And the public SaaS market is highly correlated to the private SaaS market that you’re selling your business into.
To see how this plays out, assume that in each of the scenarios above you spent $5m of your proceeds, and then invested the rest (we'll assume you had QSBS so no taxes).
In Scenario A the $30m remaining from your exit could have bought you 10,000 units of BVP Cloud Index ETF
In Scenario B the $20m remaining from your exit could have bought you 15,000 units of BVP Cloud Index ETF
(Side note: BVP Cloud Index is a public traded ETF that tracks all the publicly listed SaaS companies in the US)
Obviously, sitting here now, you'd rather have 15k units than 10k!
This is why we say the top of the market is a mirage: because the private SaaS market is tightly correlated to the public SaaS market, so you can (again assuming you’re not blowing all your proceeds in one go..) move proceeds into the public SaaS market to take advantage of a deflated entry price which, more often than not, will more than make up for your somewhat lower exit multiple.
This means, you are usually better off ignoring if private SaaS market multiples are elevated or not, and make your decision based on the other factors we outline here.
Okay, fine, so when should you sell?
Exponential growth = Myth, so sell when there's still some juice left to squeeze
Here's the thing - all growth decays. In B2B SaaS it’s even been quantified: For IPO bound B2B SaaS companies next year’s growth tends to be about 85% of this year’s growth
Our friend Jason Cohen wrote a great piece outlining this: https://longform.asmartbear.com/exponential-growth/. You should definitely take the time to read it, but the TLDR is:
Growth that looks exponential from the outside is actually a series of decaying growth curve stacked one on top of another. Essentially, for a business to keep growing, it needs to add new "stuff" regularly: New products, new sales channels, new partnerships, new marketing pushes, etc.
This then leads back to when you should sell: Because growth dominates all other factors when it comes to valuation multiple, you should sell you business when there's still some growth left. To understand why, consider the following graph showing ARR over time vs Enterprise Value (ie the price you can get for your business) over time for a business with a pretty typical decaying growth rate:
As you can see, the value of the business peaks and then starts to decline, before the business reaches its highest ARR. Many founders make the mistake of thinking “well, I just need to get to this ARR and then I’ll sell” or “Well there’s all these low hanging (and not so low hanging) fruits I got to pick and then I’ll sell” or just simply: “More ARR must mean a higher price so I’ll wait a bit longer while we still have growth”.
This is a terrible mistake to make. Numerous businesses get sold for pennies on the dollar compared to their peak valuation because of poor go to market timing decisions by the founder. Like we mentioned above, once a business dips below 20% annual growth, things get really dicey. If you can at all avoid that you should.
So to summarize - you should sell your business when there’s still some growth left. Before you're completely spent and feel like you've squeezed all the juice from this particular fruit. Before you decide you're too burnt out to add yet another product or vertical or sales channel to your business.
And if you want some help to think through this - get in touch! We often work with founders for years before they actually go to market and love chatting to B2B SaaS founders.