Bootstrapped vs. funded: how it impacts SaaS exit strategy with Diamond Innabi @SEG

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.

Episode #36 is the special episode where Tim Schumacher takes over the hosting of the podcast to welcome Diamond Innabi, Principal of the Software Equity Group, an investment bank and M&A advisory serving the software and technology sectors.

In the world of SaaS acquisitions, understanding the nuances between bootstrapped and funded companies can significantly impact exit strategies. Diamond Innabi, a principal at Software Equity Group, shares valuable insights on how these factors influence the acquisition landscape.

Introduction to SaaS acquisitions

Diamond begins by emphasizing the importance of evaluating SaaS companies for acquisition. The firm specializes in assisting B2B SaaS companies, focusing primarily on vertical markets. With around 80% of their deals falling into this category, understanding the specific metrics that matter is crucial.

Evaluating SaaS companies for acquisition

When assessing potential acquisitions, Diamond highlights key metrics, particularly for companies with an ARR (Annual Recurring Revenue) between $5 million and $30 million. High retention rates are paramount; they look for:

• Net retention above 100%
• Gross retention above 90%

Additionally, the “Rule of 40” is a critical factor, which balances growth and profitability. In today’s risk-averse market, profitability is becoming increasingly important.

Emotional aspects of selling a business

Diamond acknowledges the emotional toll that selling a business can take on founders. Managing emotions on both sides is vital to ensuring a smooth acquisition process. The firm emphasizes the need for timely communication and responsiveness to prevent emotions from complicating negotiations.

Preparing for a successful sale

For those considering selling their business, Diamond offers practical advice. Founders should conduct a thorough analysis of their company, focusing on both qualitative and quantitative metrics. This analysis helps identify strengths and weaknesses, enabling founders to improve their businesses before seeking a buyer.

Choosing the right buyer

Once a business is on the market, selecting the right buyer becomes crucial. Diamond suggests evaluating potential acquirers based on:

• Ultimate goals for the business post-acquisition
• Shared strategic vision
• Cultural fit

Understanding these elements can help ensure a successful transition and ongoing satisfaction for both parties.

Cultural and strategic fit in acquisitions

Diamond emphasizes that cultural alignment between the buyer and seller is essential. Founders often prioritize their customers and employees, making it vital for the acquiring company to share similar values and vision.

When it comes to valuation and fit, Diamond advises that a close gap between offers can tilt the decision toward a better cultural fit. Founders often prioritize their team and customers over a slightly higher valuation.

Insights on bootstrapped SaaS companies

Diamond provides key insights into bootstrapped SaaS companies, noting that while valuations may be similar to their funded counterparts, the management dynamics differ significantly. Bootstrapped companies typically have less complexity in stakeholder management, which can simplify the acquisition process.

Conclusion and future outlook

As the market shows signs of recovery, Diamond expresses optimism for the future of SaaS acquisitions. With strategic planning, careful evaluation, and emotional management, founders can navigate the complexities of selling their businesses successfully.