What is a SaaS business?
In the last 20 years, the use of technology in the economy has exploded. While technology was once considered a “nice to have” it quickly evolved into a “must-have”. A common saying is “every company is now a technology company” and it’s definitely true.
The world is going digital, and organizations that don’t make the transition will be quickly left behind. Along with the rise of the internet came the rise of SaaS (software as a service) companies. SaaS companies emerged as a competing business model to traditional desktop applications. SaaS products deliver cloud-based services that are accessed through a web browser. These live in sharp contrast to desktop applications that are downloaded onto the user’s computers. You can see the difference in the two types of applications if you compare Google Sheets (cloud-based, accessed through a browser) to Microsoft Excel (a desktop application that you download onto your PC).
A SaaS application is easier to develop and more widely accessible than a desktop application. When developing desktop applications organizations need to make sure that their application is compatible with all the different operating systems (Windows, Mac, Linux). Additionally, if an organization wants to make their application available on mobile devices they must develop separate versions of it for each mobile OS. Mobile development often requires knowledge of new programming languages and can represent a significant lift for a company. The compatibility issues of desktop applications go beyond the user’s PC. In order for a business to make a desktop application available to an entire organization, it often requires an initial IT investment in hardware such as servers and network switches. This also introduces the issue of scalability. In a SaaS platform, if the client wants to add more users they just have to pay more. With a desktop application, the client might have to go out and buy more hardware. The barrier to entry is far higher on desktop applications than SaaS applications.
When an application is available via a browser, the development process is much simpler. Interacting with a browser doesn’t change based on the OS of the end user’s machine (Windows, Mac, Linux, Android, IOS). This means that web-based applications can be made available to a larger audience right off the bat. The biggest gain in accessibility comes from SaaS applications being available on mobile devices. As of 2019, mobile usage represented slightly more than half of all internet traffic. An application that doesn’t work on mobile is an application that’s ignoring half the traffic. The increase in market reach is great for customers as well as businesses. Since SaaS businesses can reach a wider range of customers it usually means that they can offer their software at a lower price (often even offering a free version!). This makes the software more accessible to small businesses that might not be able to afford a bill of several hundred dollars per month. Accessibility cuts both ways. SaaS applications are also more easily accessed by their competitors. This means that competitors can easily copy pricing strategies, marketing strategies, and product features. The ease of access makes the SaaS business extremely competitive.
In addition to being more easily accessible, web-based SaaS applications are easier to update/patch. Patching an application is a necessary part of any software business. Patches can be deployed to fix bugs in the software or update the application with new features. Since SaaS applications run in the cloud, developers can update the app without affecting their users in an adverse way. In contrast, to update desktop applications businesses need to engage in security practices such as endpoint security because updates to an application are taking place inside a user’s home network (or company firewall). For instance, cybersecurity for oil and gas industries follow such type of security standards that are the most important to prevent from cyber crime and hackers.
Another benefit of SaaS applications is easier access to business data and easier use of data and analytics. Since desktop applications are stored locally, data is stored locally. This means in order to centralize data and make it easily accessible, organizations need to invest in their own cloud storage and set up guardrails to ensure they don’t lose their data. In contrast, since SaaS applications live in the cloud, data is automatically stored and backed-up in the cloud with no additional effort needed from the user. The centralized cloud-based storage of data leads to easier use of analytics. The data can be leveraged to find inefficiencies in the business, identify potential high-earning products and services, and answer many other business questions.
The one downside of SaaS applications is that they usually require an internet connection to function. All modern businesses have an internet connection, but an internet connection is less stable than a PC. While a PC will probably only break once every few years, it’s not uncommon for an internet connection to go out a few times per year. It might seem like a small problem, but for a business with thousands of employees, losing out on even a day’s worth of labor can represent a multi-million dollar loss of productivity. Also if a business has a significant portion of their employee base that works from home, those employees might have less stable connections to the internet (especially during COVID-19).
The downside of requiring internet access is being mitigated every day. Modern-day SaaS applications are mostly mobile-friendly (meaning they can be accessed through a phone browser) and increasingly 4G (and soon 5G) internet is available no matter where you are. If the promises of 5G (that it’ll be 100X faster than 4G) hold true, the internet shows promise to eventually not present any issues. Due to their reliance on the internet, SaaS applications tend to run slightly slower than their desktop counterparts. While this may not be a concern for most customers, customers that are using SaaS software as a workflow tool will want to ensure that the speed of the application allows their employees to continue to work seamlessly without having to wait for the application to load, which will disrupt their flow.
Another downside of the SaaS business model is a longer sales cycle. Desktop applications usually have users that pay to download the application. SaaS applications often have to offer free versions of their product to attract users, and then slowly convert those users to paying customers over the course of several months. This means that a SaaS business needs to be liquid enough to be able to handle the lag time between acquiring a user and converting that user into a customer. There will also be users that never convert into customers.
While desktop applications may still represent a viable solution for businesses that want to control every layer of the software they use (this might be an example for businesses where security is incredibly important), for most businesses a SaaS application represents the cheapest, best path forward.
What does a software as a service business broker do?
SaaS businesses are great at making money. They scale incredibly well and can address enormous markets without running into large supply chain issues. Think about it, if Nike wants to 10X their shoe-customers, they need to produce 10X more shoes. This means more factories, more employees, and more opportunities to make mistakes. In contrast, it doesn’t cost Facebook any money to add another user. Due to their ability to scale, SaaS businesses can be money-making machines. This means in the U.S. there exist a lot of SaaS businesses with ARR (annual recurring revenue) between 1 and 50 million dollars. For a lot of the owners of these businesses there comes a time where they want to sell the business in order to secure their financial future or raise money for their next venture.
Selling a SaaS business isn’t like selling a pair of shoes. The market for multi-million dollar software businesses can be small, and the selling process can be complicated. How do you know how much your business is worth? Who are the potential buyers? What’s the legal process around making a deal? What’s the logistical process around making a deal? How do you handle uncomfortable conversations during the negotiation process? All these questions (and many more) need to be answered in order to successfully sell a software business. The benefits of using software as a service business brokers are far-reaching.
A SaaS business broker can help an organization come up with an accurate valuation of their business. With a business that’s doing multiple millions of dollars in ARR, it can be easy to leave several hundred thousand dollars on the table through incorrect valuation. It also makes the negotiation process with any prospective buyers easier, as the business has a benchmark to compare any offers to, rather than just having to compare buyers against each other. Getting the valuation of a business correct will impact negotiations, taxes, and legal considerations. Getting the valuation wrong can result in a lot of unnecessary re-work. Accurate valuations also serve other purposes such as settling partner and shareholder disputes and placing real dollar figure values on employee stock options.
In addition to coming up with a valuation, SaaS-business-brokers also can handle the corporate finance services needed to get a deal done. This involves succession planning (deciding who is going to replace the current leadership team after the purchase), understanding how buyouts will occur for senior leadership and employees, creating financing options (where does the money come from?), and owning the end to end process.
SaaS-business-brokers can also help facilitate a sale by offering sellers access to a network of legitimate, qualified buyers. When attempting to sell a business, SaaS business owners can struggle in finding legitimate buyers. This can lead to the business owner wasting time engaging in conversations with those who don’t have the money to make a legitimate offer, or who don’t truly intend on buying the business. Brokers put their potential buyers through a rigorous vetting process in order to ensure that their intentions are true before setting up negotiation talks.
While SaaS business owners might be comfortable marketing their product to users, they probably haven’t done a lot of work in the space of marketing their company to people looking to acquire the business. Business brokers will have marketing materials specifically designed to target potential buyers and communicate the value of the business.
Negotiation can be uncomfortable, especially when discussing a business you’ve poured thousands of hours into. Business brokers are skilled negotiators that will be able to unemotionally assess and negotiate on the SaaS business owner’s behalf, speeding up the sales process. Additionally, SaaS-business-brokers can help identify why a SaaS business makes sense for a specific client. This process includes identifying synergies between the buyer’s business and the seller’s business and creating the story around how the acquisition will help the buyer.
The buyers of a SaaS business will most likely want to complete their due diligence. They’re engaging in a multi-million dollar purchase so they will want to thoroughly assess the assets and liabilities of the business to ensure that they are truly getting what they’re paying for. A SaaS business broker can help SaaS business owners prepare documents to facilitate the due diligence process. You don’t want to have locked up a sale only to have the negotiations fall apart during the due diligence period due to unorganized documents and information.
SaaS business brokers also allow for safe, secure, transfers of money. SaaS business brokers often have access to an escrow service, which protects business owners and ensures that they get paid the exact amount agreed to during negotiation, at the exact time agreed to during negotiation. No waiting for payments, no getting less than agreed upon.
Due diligence doesn’t just exist on the buy-side, it exists on the sell-side as well. SaaS business brokers can also facilitate conducting due diligence for the seller. This includes verifying buyer financials, understanding if the potential buyer has a similar vision for the organization as the current leadership team, and assessing overall “fit” (from a financial and cultural standpoint) between the buyer and seller.