It’s the email (nearly) every SaaS founder dreams of. You open your inbox and there it is: an offer to acquire the SaaS company you’ve spent the last few years building.
You can see all the possibilities of what this could mean… paying off the house, putting your kids through college, and maybe even a vacation after all these years.
But then the dread sets in… isn’t a SaaS acquisition a complicated process? Doesn’t it cost a ton of money in legal fees alone? What if it falls apart at the last minute?
At least, that’s how it used to be, but Andrew Gazdecki set out to change that when he founded MicroAcquire – now just Acquire.com – to help you buy and sell startups quickly, easily, and in a marketplace built for trust, transparency, and ease of use.
He recently joined our FounderLed community for an “Ask Me Anything” session to share lessons learned after facilitating over 1,000 acquisitions.
Keep reading for a recap of the top questions Andrew answered.
What are you seeing more of in the SaaS acquisition market, stock purchases or asset purchases?
That’s a great question. From personal experience, my most meaningful acquisition was a company called Business Apps.
I grew that company to about $10m annual recurring revenue, sold it to a private equity firm, and that was actually one of the negotiation pieces I used.
If you sell the business as a stock purchase agreement (SPA), you can benefit from things like QSBS, which I benefited from. I always like to say terms are just as important as the actual valuation.
Acquire.com works to facilitate asset acquisitions versus stock acquisitions, though we can facilitate them. We can’t, for regulatory reasons, encourage you. But if a buyer and a seller come to the agreement that a SPA is the better route to go without our assistance, then we can facilitate it.
In terms of tax implications, a SPA should be your goal if I’m honest – even if you don’t qualify for QSBS. If you’re not familiar with QSBS, look it up and prepare your start up for that. It takes five years to qualify and the terms are always changing, but worth looking into.
When my second start up was acquired, we paid 0% federal tax on the first $10 million, which is substantial.
The majority I see are asset purchase agreements (APA) – and that’s really designed to protect the buyer. When you buy a whole business with a SPA, you’re also acquiring all the liabilities you might not know about.
That can include lawsuits, a third co-founder… maybe there’s something in the past like a security breach. There’s just an endless list of things. So it’s very advantageous for buyers to want to do an asset purchase agreement as opposed to a stock purchase agreement.
How do you push for a stock purchase agreement?
Number one, I would just ask, “hey, listen, a stock purchase agreement would have a material impact on my net take home of the acquisition.”
Another way is what I did, using it as a bargaining chip. I could have pushed up the final sale price, but I just said “let’s do a stock purchase agreement.” There’s other things you can do. In my specific example, we had about $2 million cash on hand, so we added that to the purchase price.
If you get creative with the deal structure and being upfront in terms of your expectations can mean all the difference.
Number one, I just ask, you know, you can just ask like, hey, listen, a stock purchase agreement would have a material impact on, you know, my net take home of the acquisition.
But generally, buyers are always going to push for an asset purchase agreement because the liability that they’re bringing on is much lower than a stock purchase agreement.
What is the average time you’re seeing these days going from a term sheet to close in this market in SaaS Acquisitions? Is there a difference between different types of deals?
It depends on the buyer.
Some private equity firms pride themselves on due diligence in 30 or 60 days or sometimes even quicker. Some strategic buyers can take six months and a lot can happen during that time.
It also depends on the complexity of the business. How many employees do you have? The list can go on and on. There’s not one average I feel comfortable giving because of the differences.
But I would say, if due diligence goes past four months, that’s where you should probably have some questions. The way to mitigate that is before you sign a letter of intent (LOI). I always recommend a pre-LOI signing call.
What you do on this call is ask to outline the due diligence schedule – ask how long it’s going to take, how long they think it will take to actually close this acquisition. More than half of signed LOIs fall through for one reason or another.
Why do more than half of signed LOIs fall through in SaaS Acquisitions?
Typically, it’s surprises. Surprises kill deals, time kills deals, goodwill kills deals.
What I mean by goodwill is if you’re just constantly arguing with the buyer and you’re just not on the same page – they can walk away for any reason. Their investment thesis randomly changes, they find one thing that they don’t like that can make a deal fall through.
When you get an LOI, it’s important to get an understanding of how long due diligence is going to take and what the process looks like. Answering all of those questions upfront can really go a long way to increase the likelihood of that letter of intent closing.
Also grabbing references is a huge help, so you know you’re working with an experienced buyer.
As a two-sided marketplace, what learnings do you have that help keep the quality high on both sides of the marketplace?
We have guidelines in terms of what will get listed on acquire.com.
For example, if you bring a SaaS business and you want something like a 20x multiple, we typically won’t publish that because we just don’t see it that often. It’s possible, of course, but it’s not average in terms of buyers.
We ID verify all buyers and sellers to ensure that the person is who they say they are, and we review every listing that goes live. We actually reject about 60% of the listings that come into acquire.com. We are also always monitoring the marketplace in terms of fraudulent listings or people issuing bad LOIs – just to maintain the quality on both sides.
It’s a constant battle; we want really good deals for buyers and we want really high quality buyers for sellers on the platform. It’s always a juggling act.
We’re always monitoring both sides to make sure it’s a healthy marketplace.
What process do you use with your product team to keep improving the marketplace on acquire.com?
It’s probably a cop-out answer, but just customer feedback. We get a ton of it – probably too much of it!
It can be difficult in terms of prioritization because we also have a lot of different customer personas. We have people looking to buy small startups, and we have buyers looking to buy startups in the hundreds of millions – and everything in between.
So we have these different customer personas, and then we have different markets. We have e-commerce, SaaS – SaaS is the majority of our marketplace.
We have just treasure troves of customer feedback, and then we also do formal customer interviews. Post acquisition and also after unsuccessful for both buyers and sellers.
I guess you’d say just the standard stuff. No magic sauce there.
What percentage of the SaaS acquisitions you’re seeing are by PE firms vs strategic buyers vs individuals or small groups of people just getting started?
We’re going to be putting out a full 2023 report where we’re going to dive deeper into that.
Off the top of my head, the majority of SaaS acquisitions that we see are typically either private equity or first-time buyers. If I had to say a percentage split, I would say maybe 40% private equity.
Private equity has a few subsets, like micro private equity where it’s just a few people starting out… and then there’s the big firms up at the top.
There’s a lot of individual buyers which are typically successful entrepreneurs – they had a liquidity event and they’re just looking to buy their first business and maybe they’ll end up in the private equity bucket or starting a holding company or something like that.
The third would be strategic. We used to see a lot more strategic SaaS acquisitions, but we’re seen those on the decline recently. I think it’s just because a lot of those buyers are really focused on optimizing their core business in terms of reaching profitability.
There’s been this huge pendulum shift, I’m sure you’re all aware about, in terms of what the market wants to see, so that’s typically what we see now, but it’s always changing.
We do have a lot of strategic buyers ranging from public companies or large VC backed businesses, but the majority are typically financial buyers rather than strategic buyers.
If I had to make a gut quantification, I would say maybe 70/30.
It really depends on the company size. Typically strategic buyers will lean in once you’re past like $2-$5 million in revenue; below that there’s just not enough meat on the bones for them to really get interested.
Then there’s been a shift towards buyers looking to acquire profitable businesses – that’s private equity’s bread and butter. We did see PE sitting on the sidelines in 2021 and 2022, and now we’re seeing them step up again.
How does your go-to-market strategy differ for different customer groups?
We get a lot of our deal flow from referrals. We’re partnered with a number of VC firms, accelerators – and we create a lot of content. That’s always been an effective strategy for us in terms of reaching our audience.
In terms of the way our business works – it’s high volume. We have 360,000 registered buyers, 15,000 new buyers ever single month. We have over 5,000 startups submit to acquire.com every month.
So by nature, that strategy has to be content driven, in my opinion, because it’s too expensive to buy all those users.
But in terms of our highest quality deal flow, it’s typically referrals, partnerships. But a fun fact is that we started off with cold email and cold calling way back in the day.
And it worked! Just a little tidbit – it was just me running Microacquire at the time, and I would send emails saying “Hey, do you want to sell your startup?”
I’m sure you’ve gotten emails like this and you’re like no, go away. But then I switched it to, “hey, do you want to buy a start up?” and I got a ton of responses that were like “No, but I want to sell mine!”
I thought that was an interesting interesting psychology trick.
What are the average multiples you’re seeing right now for SaaS acquisitions? What metrics stand out?
To just kind of ballpark on the averages, and there’s of course going to be outliers, we typically see between 2x to 5x on a revenue multiple. We recently saw a 7x multiple, but I would say that is on the high end.
But really what buyers are looking for more than anything today is profitability. The businesses that we’ve been seeing recently are being valued between 5 and 10x net EBITDA.
Profitability is the name of the game. If you go to market with a business that’s losing cash, I like to say you’re essentially selling a liability. As soon as the buyer buys the business, they’re going to optimize it so it’s not losing money. If you have a business that’s profitable and it’s making money, you have an asset that’s far more valuable in today’s market.
That shift has been a bit jerky in terms of how quickly it moved from growth at all costs to profitability at all costs.
That’s the range of what we see, but there’s a lot of nuance. For example, if you’re growing 100% year over year – you could get a 10x multiple for sure. If you’ve built a novel piece of technology and it’s really showing promise, a strategic buyer might see the potential and you could get a 20x multiple. It’s all very possible.
But in terms of if you’re going to market to sell your business, you’re speaking with both financial buyers and strategic buyers.
That’s probably where I would expect to land is between two to five times revenue or five to ten times net profit.
What are you seeing in terms of cash component vs earn outs in the current environment for SaaS acquisitions?
As your valuation increases, the deal complexity definitely does too.
If you do get a 10x multiple or something higher or whatever it may be, the buyer will de-risk that SaaS acquisition typically with an earn out or conditional holdback or having you stay on within the business.
Obviously everyone wants an all cash, “I get to walk away in 90 days” acquisition. Or maybe you don’t! But we’ve seen a lot more complexity to protect the downside of buyers making offers on start ups.
Those are all negotiating pieces as well. If you don’t want an earn out, you can negotiate against that or just say no to it outright.But as valuation increases, we do see typically the deal structure get more complex to de-risk acquisition for the buyer.
How long do they usually try to lock in the founders in these types of SaaS acquisitions?
Two years? Three years? I mean, it depends. Typically, if you’re just doing a full strategic acquisition, usually minimum one year.
Standard is four, but we don’t actually see that too often because usually we try to help founders negotiate that down.
I would say probably two years is a good expectation, but four years is the market standard if you sell to a strategic buyer and it’s an all-stock deal, that stock is going to vest over a four year time period.
What advice would you have for a young founder that’s building their first MVP and looking to build their first go-to-market strategy?
Another cop-out answer, but the zero to one phase is more like you’re making a cocktail where you’re trying a little bit of this, a little bit of that.
So you want to try cold calling, want to try posting content, and then something starts to work, and then you double down there.
As an example, when I started microquire, I would go on any single podcast that people invited me to. I would cold call people or cold email. If they wanted to talk, I’d get on every single call for feedback. I experimented with paid ads.
But over time, you start to see what really works, then you just double down on that one channel and maximize that.
You don’t want to spread yourself too thin where you have all these different marketing channels. You’re just kind of okay at all of them.
And instead your efforts, in my opinion, are best when you’re just going to market if you just have one or two channels that you’re great at.
What are some of your predictions going forward into 2024 and where the market for SaaS Acquisitions is?
We saw multiples dip hard and fast earlier this year – and we’re actually already seeing them increase now. I would say that multiples are going to increase.
I think things are just going to get better. Everyones still dealing with the 2022 hangover of over-valuations and deploying too much cash, and the markets demanding profitability over “growth at all costs” again.
The market is naturally recalibrating, if you will. So I think from here it’s just going to get better, but I don’t have a crystal ball. But that is the trend that we’re seeing.
I’m confident saying that multiples will rise, more SaaS acquisitions will be happening – specifically as public companies stabilize. That’s when their appetite for acquisitions increases.
