In 2019, while I was growing lemlist at a 30% month-over-month growth rate, I decided to start a side project: lempod.
Within 18 months, I grew this side project to $600k in ARR - and then I sold it.
To do so, I worked with an M&A firm but there are also other ways to do it - if you want to know how, watch the video I made about it 👇
How to sell your SaaS with a Merger and Acquisition firm?
Well, you have 5 steps:
1- valuing your business
2- announcing that your business is up for sale
3- meeting with potential buyers
4- closing the deal
5- going through the due diligence and transition
How to value your business?
There’s actually a rule of thumb that says that profitable SaaS businesses are valued anywhere between 3x and 10x their ARR.
But the reality is that a SaaS value depends on many many factors.
I won’t go into too much detail about this because I already made a video about it - you can watch it to get more info, and you’ll get access to a SaaS valuation calculator I created 👇
So to figure out the actual value of your SaaS, you need to give the broker a lot of info about your SaaS.
Which makes this part the most demanding for both founders and brokers.
When I sold my company with FE International, I had to provide:
1- details about the business, market, competitive advantage, the potential growth opportunities, etc.
2- I gave them access to Profitwell and Stripe so they could see the metrics in real time.
3- And I made a few calls with them to answer questions regarding the business.
Once they came up with a value we both agreed on - we went with the next step: announcing that the business was up for sale.
How to announce that your business is up for sale?
This step is divided into two parts:
First, the brokers will send their prospectus to their top buyers. The ones they think will fit most with your business and will bring you the most cash.
And then they will share it with their entire network.
Their goal is to find potential buyers for your company that you’ll be able to meet in the next phase.
How to find the right buyers for your business?
But before you get to this, you need to answer a very important question:
Do you want to stay in the company, or do you want to leave the business as soon as possible?
Both options are doable, but it doesn’t mean the same thing for the buyer.
In most cases, buyers prefer that the founder stays in the business for a couple of years (but it’ll depend on the size of your company) because, in their mind, it’s less risky.
But it’s also possible to leave the company right away, and that’s what I did when selling lempod.
How to close a deal when selling your SaaS?
Which brings me to the last part: closing the deal.
Most people think that once the deal is agreed on, the business is sold, and they’ll receive their money… and that’s it.
In reality, that’s not what happens 👇
You have a lot of different ways to structure a deal.
For M&A, the most known deal structure is a mix of cash and earn-out. Essentially, both parties will reduce the risks they’re taking.
Let me explain:
When selling, the founders will take some cash up front, and get earn-outs (basically more money) based on either:
1- time: every year, the founder will get an earn-out
2- revenue: for a few years, the founder will get a percentage of the SaaS revenue
3- milestones: at every milestone the SaaS will cross (usually based on the ARR), the founder will get an earn-out
But why does it mitigate the risks?
Well, for the buyer: the bigger the earn-out is, the less risk they are taking - because it means that the amount of cash upfront is a bit smaller.
And for the founder: if they think their business can keep growing, they can still benefit from its growth for a few years money-wise.
Plus, the advantage of this structure is that all of the incentives are aligned: you help the new owner grow the company you created for a few years… and in the meanwhile, you get some more money.
In my case, I did a mix of upfront cash and earn-outs because I believed that my company could keep growing (and I wanted to benefit from it).
And that’s a structure I used again when I acquired two SaaS, Taplio and TweetHunter, a few years later.
How to finalize the sale of your SaaS?
Now, let’s get to the last step: the due diligence and transition.
And that’s the most tricky part since you’re often dealing with huge among of money and important assets.
Here’s the exact process I followed with FE International and my buyer:
1- We signed a LOI, or letter of intent. This is a non-binding document that expresses the desire of both parties to do business together.
Essentially, non-binding means that you have no legal obligation to pursue the deal.
But this also means that the buyers can look at your metrics and say that they won’t buy your company anymore. And… a lot of US-based companies are known to send the LOI just to get the key financials on some companies without ever buying.
2- After that, the buyer went through both the technical and business due diligence.
A due diligence is an audit the buyer will do to check whether or not the info you gave them about the business was accurate. In other words, they’ll check the data, the code, the assets, etc.
3- And then we signed the official contract: the APA (which stands for Assets Purchase Agreement)
Let me explain why this is, in my opinion, the best type of contract:
Essentially, the APA allows the buyer to buy the assets of your company (and they don’t even have to buy everything) and not the whole company itself.
Plus, most of the time, international companies have different legal structures, tax systems, legislations, etc. that can become a BIG pain when trying to sell a company.
Which means the APA contract is overall super advantageous for international companies because the process will go much smoother.
4- And finally, I got paid. The payment will go through a third party. This means that the money is locked until you’ve sent all the assets.
Overall, the process of selling a company can take a few months to a year.
And it will take you a lot of time and energy as a founder (especially if you do it for the first time).
That’s why it’s important that you’ve defined what you want, and what you expect out of the sale.
In over 75% of cases, deals fail after the LOI is signed because the founders hadn’t defined exactly what they were expecting.
If you want more tips on how to grow SaaS businesses, feel free to check out my other articles, as I’m creating a lot of content on my journey growing 5 SaaS products!
Peace, love, and profit! 💰
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