Exit Strategy: Weighing the Pros and Cons of Selling Your SaaS Company

Hiker man choose between to directions at the mountain

If you are running an early software startup, your focus should be firmly placed on developing (and selling) an incredible piece of software that enhances the lives and businesses of those who use it.

However, if you already have an existing successful product, you have other goals.

Typically, those would be geared towards providing continued value and finding new markets and customers.

Although, the thought of cashing out has probably crossed your mind.

Why not?

So many options open up to SaaS founders who exit properly. You could become wildly philanthropic or live the life of an early retiree.

Whether you’re daydreaming during a coding break or have a serious offer sitting on your desk, we hope that this post will help you derive the best and worst aspects and help you answer the most important question.

To sell or not to sell?

So, break out your old scales. We are about to weigh the pros and cons of selling your Software as a Service.

Important Note: We don’t want to influence you one way or another. By listing all the pros first or second we may make one decision sound better than the other. Instead, below you’ll find a list of common concerns to consider. Use these concerns as weights to help you determine if selling may be an option for you.

Concern #1: Sell Price and Timing

Depending on your revenue levels and how fast your company is growing, pricing can be tricky. Timing is also incredibly important in a decision of this magnitude. We’ll start out by taking a look at what factors go into pricing your product for a sale.

Large companies set aside tens of millions to buy assets (like your startup). Deciding how much of this huge budget they’ll spend on you is primarily an equation of your monthly revenue (MRR) if you’re newer and annual revenue (ARR) if you’re more established. On your end, the amount offered can vary wildly and can even come to an end based on your revenue. How about a few examples?

Early Example

You’re a popular startup that’s reached $1 million in ARR within 9 months. Your company has momentum, traction, and most likely press.

Your early example is going to be the sweet spot for sales. At this level of growth, mixed with momentum, you could conceivably command a premium of $30 to $50 million (at the top-end) from larger tech corporations that are looking to cash in on your popularity.

Mid Example

Your SaaS is chugging along in year 5 and has reached $200k in MRR. You’re not growing exponentially, but churn is low and you’re adding a decent chunk of new users quarterly and pretty much double every year.

Without much press and without being the “hot” startup, you’ll find that buyers are looking to buy solely based on a multiple of your revenue. For instance, if you’re doing $2 million ARR the offers will range, but on average, you can command around 10X that annual number.

Late Example

You’re pulling in over $1 million (MRR) and still growing at a steady rate. VCs have taken notice and engaged you.

However, there could be an issue past this point.

Depending on your overall size, funding level (if any), and growth rate, your valuation may be too rich for many buyers. Given the SaaS acquisition market, a common top seems to be around $400 million. If your value is over that, it becomes difficult as the pool of buyers shrinks.

Further Reading: Here’s a great resource that goes into SaaS timing and valuation in detail.

Things to consider for your Pro/Con List

  • Momentum and churn (Will you be worth more or less 6 months from now?)
  • Your MRR/ARR multiple (How much can you command?)
  • Venture Capital funds received (How much does our funding say we’re worth?)
  • Likelihood and size of potential offer (Would this be worth it?)

Concern #2: Company Transition

When you consider selling your current SaaS, one of your chief concerns will be the transition. You may have even wondered if you could stay after the buyout.

There are a ton of nuances to a transition of this size. Things like letting staff and customers know what’s happening and helping them move into a new culture can be daunting.

In fact, aside from the payout, the transition of your SaaS is mostly made up of cons.

You’ll really have to hold onto your reasons for selling while considering these concern on your list. Nevertheless, here goes nothing.

Keeping the Most Valuable Players

You built your company with the help of some talented individuals, and those same people help keep things going in the right direction.

When you sell, it’s based on the thought that your product will continue to head in that direction. To help this be a reality, you’ll have to convince crucial staff to hang in there for the new owners. If you are staying on as the acting chief, this will help matters. (It’s harder to do if you want to start something else or plan a trip to Mars).

Protecting Other Players (The Rest of Your Awesome Crew)

Chances are, your policies and HR are lacking compared to a large Fortune 500 tech company. That’s ok, but it also means that growing pains will happen during the transition period.

Your people feel like they are a part of something special and when that is eaten up by a gigantic multifaceted corporation, emotions run high and–if handled poorly–this can harbor betrayal, hostility, and “we’re being taken over” emotions.

There will (almost) always be a little drama, but you want to keep your employees from feeling like they’re being taken over.

Consider the “buy in” of your crew, and recognize that your company values and culture are bound to influence your exit strategy on an emotional level.

Transition Time

Changing hands takes time, legally and culturally. The average amount of time for a decent melding of two entities (in a buyout) is between two to three years. And it takes more than just showing up, walking around and playing with Nerf guns all day. You’ll have to develop a plan to ensure success.

Things to consider for your Pro/Con List

  • Key Staff (How can they benefit from the sale?)
  • All Staff (This one’s personal. Many owners have a hard time parting ways with staff and products)
  • Timing (When will you announce the sale to your team? Are you looking to take the money and run?)

Concern #3: Personal Motives

After you’ve determined that you are comfortable with selling, you’re forced to tackle the big existential question:

What would I do without my company?

It’s an important question. Why?

There are a ton of founders who get tired of the grind within five years. When you lose the motivation that led to your success, you’re caught wondering what you want to do with your life.

There is a whole list of pros and cons on why tens of millions of dollars may help or hurt you in finding a new passion. Money and a lack of direction are a dangerous combo. If you are motivated to sell your company as a way to quit, make sure you have a plan for when you do get out.

This portion of your pro/con list is primarily up to you. We’ll list a few things to kick start your imagination.

Things to consider for your Pro/Con List

  • Start another SaaS (you’ve done it once, and now it may be easier, with your newfound confidence, capital, and connections)
  • Enjoy your family (Growing a SaaS has a way of limiting personal/family life and it may be time to play catch up)
  • Mini Retirement (Surf, backpack, learn, travel, blog–you know what we’re getting at here)
  • Charity (Be good to people in need with your success)
  • Invest (Take a seat on the other side of the table and offer your now highly-sought advice and money)

Your Turn, Drip Readers: What’s Your Exit Strategy?

The time has come for you to get out a legal pad, make some bubble charts, and use your imagination. Make a pro/con list that takes everything/everyone into account. Make your goals clear and (if you do decide to sell) don’t be afraid to say no to offers that don’t mesh with your list.

After all, it’s your company… for now.

  • Tom

    Solid list. When we approach a valuation we consider similar aspects. Our process starts with a conversation regarding six value-drivers (which you mentioned): geography, business mix, management depth and size, trends and margins. We try to get to a ballpark value, between x and y and proceed from there. Often times…ok, sometimes value expectations are unrealistic and it doesn’t make sense to proceed…and so on.