The best time to sell your SaaS business with Pavel Prokofiev @saas.group

saas.unbound is a podcast for and about founders who are working on scaling inspiring products that people love, brought to you by https://saas.group/, a serial acquirer of B2B SaaS companies.

In episode #1, Anna Nadeina talks with Pavel Prokofiev, Head of M&A at saas.group.

Pavel has been leading M&A at saas.group for nearly three years, bringing a wealth of experience from his previous roles in private equity. His journey through corporate finance and investment in high-growth technology companies has equipped him with the insights needed to navigate the complexities of SaaS acquisitions.

Current Market Trends and Acquisitions

The SaaS acquisition landscape is constantly evolving. Pavel notes that the market is currently tighter compared to previous years, primarily due to fluctuating interest rates. As capital costs rise, potential buyers are becoming more cautious, and sellers may hold back, hoping for better offers in the future. This creates a challenging environment for transactions.

Despite these challenges, saas.group has successfully closed three acquisitions in Germany this year. These include:

• Ultra-bootstrapped companies that are highly efficient and profitable.
• Established businesses with longstanding market presence and strong products.
• A rapidly growing company with a product focused on a niche market with potential for global expansion.

The focus remains on finding SaaS products that have long-term growth potential, and establishing partnerships with founders to help scale their businesses effectively.

Understanding the Acquisition Strategy

Unlike private equity firms that often seek to flip acquisitions for profit, saas.group adopts a buy-and-hold strategy. This approach allows them to invest in companies with strong products and customer bases, even if their growth is not as rapid. They look for businesses with:

• Annual Recurring Revenue (ARR) between $2 million to $10 million.
• Strong customer retention metrics.
• Efficient marketing budgets.

This strategy enables founders to exit their businesses while ensuring that they have the support needed to grow and thrive post-acquisition.

The Importance of the Rule of 40

The Rule of 40 is a key metric in evaluating SaaS businesses. It states that a company’s growth rate plus its profit margin should equal or exceed 40%. This metric is particularly important for founders as they assess their company’s health and attractiveness to potential buyers.

Pavel emphasizes that companies that are growing but not generating profit can find themselves in a precarious position, often resulting in reduced valuations. Founders should aim for a balance between growth and profitability to meet this benchmark.

Key Metrics for Valuing a SaaS Company

When it comes to valuing SaaS businesses, several metrics come into play:

• Net Dollar Retention: This measures the percentage of recurring revenue retained from existing customers over a specific period, accounting for upgrades, downgrades, and churn. A higher percentage indicates a healthier business.
• Gross Dollar Retention: Similar to net retention but excludes upsells, providing a clearer picture of customer retention.
• Customer Acquisition Cost (CAC): Understanding how much it costs to acquire a customer is crucial in evaluating the effectiveness of marketing strategies.

Founders should strive for a net dollar retention of at least 90%, particularly in enterprise-focused SaaS businesses.

Preparing for an Exit

Preparation is key when planning for an exit. Pavel suggests that founders should start organizing their documentation and metrics well in advance, ideally six months to a year before considering a sale. This includes:

• Tracking key performance indicators (KPIs) and metrics regularly.
• Ensuring that financial records are clean and up-to-date.
• Engaging with potential acquirers early to gauge interest and gather feedback.

Even if a company is not yet ready to sell, establishing these practices can facilitate a smoother transition when the time comes.

Micro Acquisitions and Serial Acquirers

The trend of micro acquisitions is gaining traction, with many founders looking to sell smaller SaaS products to serial acquirers. This movement allows entrepreneurs to exit while ensuring their products are nurtured and grown by experienced acquirers.

Pavel highlights that while this market is expanding, it remains essential for buyers to be cautious. Many micro-acquirers may lack the resources or experience to scale a business effectively, which can lead to challenges post-acquisition.

The Role of AI in Acquisitions

AI is increasingly influencing the SaaS landscape, but Pavel advises caution in acquiring AI-based startups. Many of these companies may be in their infancy, lacking the stability and maturity that saas.group looks for in potential acquisitions.

However, saas.group is integrating AI into its existing portfolio, enhancing customer support and operational efficiencies. This dual approach of cautious acquisition and leveraging AI within established businesses allows for strategic growth.

Risks for Sellers

Selling to a company like saas.group offers several advantages, including cash on day one and the opportunity to exit entirely. Overall, Pavel talks about 3 main tasks SaaS founders have when they’re considering an exit:

• Understanding the buyer’s financial stability and ensuring they have the necessary funds to close the deal.
• Evaluating the buyer’s intentions and whether they align with the seller’s vision for the business.
• Considering the potential for changes in leadership or strategy that could impact the future of the business post-sale.

Founders should conduct thorough due diligence on potential buyers to ensure a smooth transition and safeguard their interests.