# When to Sell Your SaaS Business: How to Get a 5x Better Offer

Channel: MicroConf
Video: https://www.youtube.com/watch?v=gQf4k8_z9Eo
Duration: 21 min
Language: English
Words: 4209
Transcript page: https://viewrankai.com/tools/youtube-transcript/gQf4k8_z9Eo

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[0:00] So, I'm going to talk to you about when you should sell your B2B SaaS business. And I actually get asked this a fair bit, uh which makes sense because basically selling your SaaS business is really the most efficient way to extract value for the value that you created and put it in your pocket. And number two,

[0:18] everybody sells. Eventually. May- maybe except like 37signals, but fundamentally everyone sells. So, I'm going to start off with just some useless advice. I'm sure you've heard this before. And this will be a trend actually. Some of my slides you may have seen earlier today. Um the number one point you hear often from VCs is that honestly it's the equivalent of saying like you shouldn't worry about when you should sell your SaaS business because startups are bought, they're not sold, didn't you know? Um which to me is always slightly ridiculous. It's a little bit like, oh, I want to find a date, but I'm not going to go on dating

[0:49] apps, I'm not going to go to bars, I'm not going to talk to anybody. They're just going to come to my house and knock on the door, and that's how I'm going to find a girlfriend or a boyfriend. Um so, I think that's completely useless. The other point I'm starting to hear now is like SaaS is dead, guys, didn't you know? So, like don't even worry about

[1:04] it. What you have is worthless. Moving on. Actually useful advice for you. Number one, you should sell your SaaS to whomever pays the most at its most valuable and don't [ __ ] it up. Talk over. Diving in. Sell to whomever pays the most. So, what does that mean? Okay. So, the key key thing to understand about B2B uh SaaS market when it comes to buying and selling B2B SaaS businesses is that it is extremely an extremely opaque market. Now, if you come to sell your house and you find a world-class realtor, they might be able to move the market, like move the price for you 5, 10, 15%, right? That's an

[1:47] amazing realtor. That's a that's a huge jump for them to do. In B2B SaaS, the difference between only showing your business to value buyers and people that don't want to pay very well versus the people that do pay very well can be as much as 5x. I have seen multiple times that folks get offers for the same business at 5 million and 25 million

[2:08] dollars. And the the other thing that you should understand is that there's a whole industry out there, billions of dollars that their entire alpha, their business model is what they call proprietary deal flow. And what that means is they're going to do cold email, they're going to come to conferences like this. I see some of you here. Um and they're going to find off-market deals and buy them for cheap. That's the entire business model and they're pretty open about it. If you get access to the decks that they put give out to their investors, they will say that we are looking to find off-market deals for

[2:42] cheap and that's how we're going to make our money. The problem for founders is it's not easy to distinguish between somebody willing to pay 10 million and somebody willing to pay 30 million dollars. Because say you get an email from somebody, right? Comes in your inbox. Hey, super excited about your space. Let's get together. Let's chit-chat. Let's talk about what we're seeing in the market and you go, oh, it's so-and-so capital. And you go to their website and it's blah blah capital or so-and-so partners and they all say the same thing. This is super strategic for us. We're very founder friendly. Blah

[3:15] blah blah blah blah. And the And on top of that, the fact that it's extremely opaque to you, it's very hard to know whether this is the kind of buyer that will pay top dollar or who will never pay more than 1x ARR is that even when you're talking to folks that are strategic or are able to pay a lot more, they're not going to pay a lot more just because they're strategic. It's not like, oh, here comes a Fortune 500 company and because they're strategic, they'll definitely pay 20x. No, they'll pay as little as possible. That's what corp dev people at these buyers get paid to do is to pay as

[3:50] little as possible. All right. The other thing to know is there's basically a hierarchy of buyers out there. And actually, I I'm sort of faulting my designer a little bit here. I wish he had spaced it out a bit more. It's sort of at the top. Oh, and before I start with this, like just so you understand the sort of breakdown of the buyer universe up to about 20 million of ARR, it's about 20% strategics, like true strategics, like Fortune 500 companies, about 70% private equity, and

[4:17] about 20% other, like other stuff. And the the people that pay the most are strategic buyers or growth-focused private equity. People always seem to assume that private equity is just one big blob that all, you know, are the sort of the same and it's like a it's like a Springsteen song, you know, everything goes to hell, they're going to fire everybody, and then, you know, shut down everything. But that's not actually true. You have to understand that private equity has very many different kinds of strategies that will definitely impact, uh, you know, how much they're willing to pay for your business. So, there's a very big

[4:47] difference between a growth-focused private equity fund and a value-focused uh, private equity fund. All righty. But the the other thing to understand, too, is like why? Why do some people Why do some buyers, uh, pay more? And or why can they pay more? And the reason basically is because it's worth more to them. It's worth more to them even than it might be to you, right? Because imagine if you have a SaaS business and it happens to to do the one bit of functionality that this big Fortune 500 company is missing, right? To them, if they can just buy you effectively off the shelf, not have to

[5:21] build it themselves, they can then, you know, sell that. Maybe they're able to land a ton more deals because they have this functionality. They may be already have branding, marketing power that you have nowhere near, right? Like if you have a Fortune 500 company, they may even have an entire enterprise sales division that could just plug in and start selling your your SaaS at a scale that you could only dream of as an independent SaaS business. So, that's

[5:44] basically the reason why. All right. let's talk about at its most valuable. So, this comes down to like optimization. You you're thinking about like, okay, fine, there are different kinds of buyers, the market's opaque, but what can I do? Like, how do I think about how to optimize the value of my SaaS business? And really, the four key things that impact valuation in order for a B2B SaaS business are growth, {exclamation point} ARR or revenue, churn, and profit. And you can argue about this the two or three at the bottom, which order they go in, but fundamentally, these are the

[6:17] four pieces. Um let's take them in reverse order. Hey, Rob Walling here. If you're watching this and thinking, I wish I could be in the room for talks like this. You can, and you should. So much of the magic at our events happens in the hallway track. That's where you connect with two to 300 like-minded founders who are trying to solve many of the same problems you are. I hope you'll join us at our next event. Head to microconf.com/events to grab your ticket. Our next one is in Iceland in September of 2026, and then

[6:48] we'll be in Austin in April of 2027. How profit impacts valuation. I mean, obviously, more profit, more better. Like, obviously. Um but the key thing to understand is there's sort of a breaking point right around uh break even. So, if you're going to go to market, if you're going to sell your business, and you've taken some investment, and that because of that you're burning money, you should think about getting yourself to at least break even. Because there are class of buyers a a large number of buyers that will just disqualify themselves from being

[7:20] interested if you're burning money. And so, [snorts] bec- if there are fewer buyers, the value will probably go down. Um the second part of that is just natural, right? Look, if they look at it and go like, okay, we have about, you know, this is worth about $8 million to us, but if they have to think to themselves, all right, well, it's 8 million, but like, we probably need three of that million to keep the company running after we bought it, well, that's $3 million that's not going in your pocket. So, in general, you should understand this that the step up from being like -10% burn to +10% profit

[7:53] is a bigger step up in valuation than going from break even to +20%. And so, whatever happens if you're burning money, you should try you should at least very try to at least have line of sight on on break even before you go to market. All right. Second point, churn. How does churn impact valuation? So, SaaS is great because of recurring revenue, right? If we didn't have recurring revenue, then it wouldn't be SaaS and we wouldn't be excited about it. And churn is sort of the defining characteristic of how recurring your

[8:23] recurring revenue is. And there are two key things that every single buyer of SaaS, two metrics that every buyer of SaaS will care about that you should know. And it is GRR and NRR. GRR is gross revenue retention over a year. What that basically means is, take your entire all the revenue you have January 1 and what percentage of that revenue is still there December 31st of

[8:48] that year. [snorts] And then NRR, which is basically GRR, but then you also can add back like expansions and upsells and all this stuff. And look, you can sell a business at whatever like what I'm saying, but more than 80% GRR is normally what most buyers will start to think, yeah, that's that's good or great. If you go below 80%, there are some folks that just won't be interested. And so, if you are at about say 75, 70-75% GRR, you might start to think about how do I get that number up to 80% before going to market. And that might mean actually doing some some short-term kind of

[9:28] ridiculous stuff like, you know, let's not have a paid trial because that counts as a cancellation. Let's just give them a free trial and then no count their activation until after they actually start paying us, that's what I mean. And for NRR, right about it, less than 100% is considered so-so. If you're above 120% NRR, then you're basically sort of

[9:47] world-class, leading in your space. How does ARR impact valuation? Well, the bigger is better, basically. Like if you have the same business, the same metrics, everything else, it's just that say it's at 10 million instead of 2 million, then obviously the 10 million ARR business is going to be worth more and not just because it's a 10 versus 2. Now, the main thing I want you to understand about this is the one of the really big thresholds when it comes to B2B SaaS valuations start at somewhere between 1

[10:16] and 2 million of ARR. Below that number, there isn't a lot of institutional capital there. There isn't a lot of private equity. Like I told you, like 70% of the buyers are private equity. And so, there's those people typically don't get interested unless you're doing at least a million or two. That number moves around a little bit. Like 2021, it was like anything above 1 million, and now it's probably more like 2 million. But what that means is if you're close to this threshold, certain if you're say 1.7 and you're growing pretty well, and you're thinking, "Ah, I kind of want to

[10:49] sell now." Uh my advice might be, "You know what? Like just get over two and then do it." Just because it'll open up much more widely the buyer pool for you. Um the other two, 5 million and 10, these are just thresholds that some of the larger private equity funds, which have even more money, uh start to get interested and start to operate. So, 5 million and 10 million, typically your

[11:11] valuation um goes up further. Now, to the number one thing, growth is the dominant factor when it comes to valuation. Let me say it again. The dominant factor. If you can fix nothing else, if you can only fix one thing, growth is the thing you should be fixed. And obviously more growth is always better. Like if you're going to take a business and it's doing 40% versus 50% growth, obviously it's 50% is better than 40. And the same

[11:42] thing with 60 versus 50 etc. etc. The one thing you should know about again, and and this is sort of be a theme like there's where is the where is the buyer pool changes and it's right around 20%. 20% growth, if you go below that very often the growth focused private equity guys tend to take a step back and say, "Eh, you know what? Probably not for us." And so then you often end up with value buyers, turn around shops, that

[12:06] kind of thing. And so what does that mean for you? Well, that means if you're looking at your growth and I'm going to get to some graphs that might look quite familiar to this room actually in a second here. Um Uh if you're getting close to that and you feel like growth is sort of stagnating, say you're at 35% and you knew last year you were at 45 and you started to do the math and it's like, "Eh, maybe next year I'll be at 25." Maybe sell now rather than waiting

[12:30] to stall into that 20, 15% growth. Because the the the difference can be stark. Like if you were at 25, 30% growth, you might sell for four times ARR. If you then dip down to 15%, you might struggle to sell for one to two X ARR. So that's a very important uh breakdown. And uh Here Here's how you find out that I forgot that Jason was talking at MicroConf. So I stole these graphs for

[12:58] him. [laughter] Thanks, Jason. Uh before I realized and I only realized when he started talking. I was like, "Oh crap, I wonder if he's going to talk about the elephant graphs cuz that's what I'm going to talk about, too." And fundamentally, it's the same insight, right? I don't need to explain this again now cuz you guys just did it.

[13:14] Like the because of what I said, right? Growth is a dominant factor, but as Jason showed, all growth decays, right? You have to be willing to stack one growth curve on top of the other over and over and over again in order to keep growth up. That's an inevitable fact of running a SaaS

[13:30] business. And so, the canonical sample, again, shamelessly stolen from Jason, is HubSpot, right? From the outside, HubSpot just looks like it was a smooth journey to billions of dollars, right? And the fact is, if you look at what actually happened, you know, it was like they launched in 2006, uh then they bought probable in '11, and then they launched CRM, and then they launched service hub, and then they launched CMS hub and operations lab, all this stuff, right? One on top of the other. And that's the elephant curve in action, right? They probably one thing, and then they buy this company, and then they launch this product, and then and in

[14:04] between there there's obviously a bunch of marketing channels and things as well. Now, why do I harp on this point when it comes to thinking about when to sell your SaaS business? Well, the reason is because of this graph. And what this graph shows is it has dollars going up the Y axis and time going to the right. And what it shows is the the sort of smooth black line is MRR. So, you can

[14:25] imagine this is the MRR of a business. And the EV, it's, believe it or not, Auren Hale said, it is enterprise value, so the value of the business. And so, what this means is that the value of your business can go be going down while it's still growing. And that's that startles people often. Sometimes people come to me and they say, "Look, I've finally got to the number where where I wanted to

[14:49] I needed to get to I'm still on, yeah. Um I needed to get to 8 million, and now I'm at 8 million, and I want to sell." And I look at their ARR growth over time with their ARR growth, and if they've been stalling out, they maybe grew at 40%, and then they grew at 20%, and then they finally grew at 5% to get to 8 million. And they may have been waiting for that long to sell the business because they had in their head, "I need to get this number." A bigger number is always better, right? Well, in this case, maybe for the last 2 years the

[15:14] value of their business has been going down, which is a tragedy if they really wanted to sell 2 years ago. So, don't do that. So, really, like when you should sell your SaaS business is fundamentally to do with a psychological decision that for yourself. Basically, if you want to keep going, if you don't think right now is the time to sell, then you know, you should know in your heart of hearts that you have the risk appetite to do the next thing while

[15:46] the current thing is still working. That's basically what you want to be able to do. You want to be able to have You should You should know in your heart of hearts, I'm not ready to sell right now because I have the energy and the desire to do things like launch an entirely new marketing approach, going into a new vertical, maybe acquiring a different product, uh launching a new product, expanding into new new geography, doing a different kind of market. All those two things should be things that you are excited about doing

[16:13] while the growth is still going. And if you're not feeling that, then yeah, it might be time to think about maybe to sell. Because as the current growth sort of decays, the value of your business is going down. Um because you don't want to be this guy. This is somebody that I talked to uh the the sort of I've labeled some things just to cover up, not that you'll ever figure out who it is, but like if you look at this, like they grew like crazy. This is like going up to COVID, and I talked to him first time at the top there with the moon and

[16:42] the rocket and all this stuff is. And this is like '21, '22. And uh yeah, I was like, "Look, this is a growing really well, and it's like you probably worth 25, 30 million dollars, something like that." And he's like, "Oh yeah, but I'm not going to sell now. It's amazing times." And then I spoke to him a couple years later when he was down here, and uh the business is probably worth 4, 5 million at that point, which is a different number, that turns out, than

[17:05] 25 and 30 million dollars. Um so, you don't want to be that guy. All right. Uh do I have time to go through And I'll I'll cover this. Like don't forget that. The The main thing for me is like the main main mistake I see with founders when it comes to sell is that they're sort of like not for sale, but they're also not not for sale. They're like, "Oh, I get emails and people call me and I'll talk to that guy or I'm building relationships with this strategic or oh, it's flattering that, you know, KKR called me and so I'll take a call with them, blah, blah, blah." My

[17:34] point is, you should have two modes. You should either be for sale, in which case you or your banker or whomever should be very active about putting yourself in front of all the people that will pay the most, or you should not be for sale and you should actually be kind of stand offish. You should make your business a

[17:48] little bit hard to get. Because what you want if you're not for sale is for them to come with an offer that's like, "Look, I'll make you an offer you can't refuse." That's the That's how you get the top dollar. Not being like, "Sure, I'll take your call." or "Yeah, great relationship." Because think about this. Why are they spending all this money on cold email? Like if you look at Insight Partners, Insight Partners has something like 80 or 90 people whose full-time job it is to cold email founders and call

[18:15] and talk to them. Why do they do that? Because they think that the people they cold email will sell for more money. No, that doesn't make any sense. They do it because they know that if they build a relationship with a founder, they can get away with a lower price. So, don't let them. Um the other point, don't try to temp to to to time the market. And And really the fundamental reason for this is if you're good at timing the market, like what are

[18:41] you doing at Micro Golf? Go work on Wall Street, make a gazillion dollars, right? Just You're just not going to be good at it. Um the other point is that basically um the market correlates to the roughly the broader public markets. And so, like we had a downturn when Russia invaded Ukraine, that was really bad. We're having a downturn now because everyone is convinced that SaaS is dying. And you

[19:01] might think to yourself, "You know what? I'm going to wait till the market feels a little better." And I think that's a stupid idea for two reasons. One, you should focus on the [ __ ] that you can control and it's better to have an attractive asset for sale in a social market than a social asset in an attractive market. And because all growth decays, while you wait for the market to improve, the attractiveness of

[19:22] your asset could be going down. So, don't do that. And also, obviously, like look, if you sell for $20 million, then you're not going to like just, hopefully, take all that money and just blow it, you know, like on Porsches and all this cocaine and stuff. You're going to invest it in what? Like the public market. Well, if the market's down, that's an attractive entry point compared to being at the top of the

[19:44] market. All right. Um also, uh there's a guide in your sort of freebie things that's for me. Check it out. If you can find the typo on the cover, I will give you a crisp $2 bill. The first 20. I've been running MicroConf for more than a decade, and the thing I hear from attendees more than anything else is I wish I'd come sooner. Not because of any single talk or tactic, but because they finally found their people, founders who get it, founders who are building the same way they are. At our events, it's not just about the talks. In Portland, we organized waterfall hikes, food

[20:19] tours, happy hours, real time with other founders outside the sessions. And those relationships don't end when the event does. They turn into the people you text when something breaks or when something finally works. If you've been thinking about coming, I hope you'll join us in Iceland and Austin. Get your tickets at microconf.com/events. If you got something out of that talk, make sure you hit subscribe. We're

[20:41] putting out more of these every week. And that wasn't the only great talk from Portland. Go watch this one next.

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