Acquiring SaaS Business and Early-Stage Startups

Acquiring SaaS and early-stage startup businesses may demand a strategic application of research, assessment including risk analysis, and stakeholder decision making. The extent of acquisition that has been strategic to businesses in recent years has paralleled its evolution as an applied business strategy, and analysts have been increasingly viewing businesses as products themselves. The potential to make great gains from purchasing such a product type has created further demand to develop strategic improvements in applied processes, models, and approaches to assessment such as successful hallmark analysis.

Businesses as products as a meta trend has included case examples of MicroAcquire, Empire Flippers, FE International, and Flippa. Buying and selling businesses has become increasingly easy while potential investors have attempted to improve analysis potentials for recognizing what types of businesses are most strategic to acquire, so that known and evolved techniques can be most successfully applied after acquisition. Business sales statistics recorded through the operations of business-as-product companies have included the average business sale being near $150,000,000 in marketplace sales from Flippa since its 2012 launch (with $100,000,000 achieved in its first four years), and $60,000,000 in sales achieved through the first six years of FE International’s operation.

Business valuation processes have evolved substantially over time, with new factors sought as hallmarks of success across different organization types. Valuing seller discretionary earnings has been a major area targeted in assessments, while EBITDA or SDE is used as a comparative point across different organizations or rationalization basis in stakeholder decision-making discussions. Some might argue that EBITDA is not ideal to use in SaaS valuations, as growth in these types involve investments that are recorded as expenses. While measuring revenue provides insight into critical aspects of SaaS organizations, if the organization is not growing, then the revenue considered in the valuation can be misleading. This is therefore recommended to be avoided in the general case, with potential optimization of affected factors prioritized in analyses.

Buying SaaS companies may be most strategically achieved in following expert recommendations and best practices in the field. Which factors are relevant to one’s specific business scenario may be dependent on consumer relationships that stakeholders are adamant about, and that warrant further market research. The sources of purchases is an important aspect, and therefore prospective buyers have to give consideration to these and any records they may provide for strategic purposes. It is generally recommended that individuals who are not experienced in purchases ensure that their first purchase is small, for following operational-based reasons in addition to investment funding requirements. 

Considering additional aspects of best practices and expert recommendations, buying such companies should encompass a consideration of plans for use. Whether the buyer plans to make an inexpensive and quick purchase in order to comparably quickly address expense potentials and their own sale, the buyer plans to grow the business for some time before selling it, or the buyer plans to use the organization and resources as much as they can, efficiency and effectiveness can commonly be optimized through steps specific to intentions. These elements are related to relevant market reports and business projections in best practices and recommended strategy. Beyond the above, sales should be approached with due diligence that addresses technical and financial scope. 

Successful acquisitions can further be made and benefit from applying further best practices in marketing, finance, and administration. Buyers have to be sure that they can properly take over and maintain or improve outcomes. Accountants or experts are commonly recommended to review the organizations finances beyond what is fundamentally transparent to the public (or special permissions granted to prospective investors).

Last but not least, ensure you are not following a “sunk cost” logical fallacy. Buyers should ensure that they address competition, know when to apply their exit strategy, and operate in a due diligence process. Failing to remain current with literature may affect the capacity to apply best practices in addition to expert recommendations.

References

https://www.forbes.com/sites/abdoriani/2020/03/06/how-to-make-your-early-stage-startup-valuable-to-acquirers/?sh=7fba178340cc
https://www.thebalance.com/how-can-average-people-invest-in-startups-4588451
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Philip Tadros - Founder
Philip Tadros is the Founder of Doejo an award winning Innovation Studio with over 50M dollars sold in Innovation, Consulting and Business Development services.