How to Know When It’s Time to Sell Your SaaS Business

Deciding when to sell your business or seek a major investment is a life-changing decision. After devoting your hard work and time to developing said business, you deserve to reap the maximum rewards.

Just like timing is crucial for your clients when deciding to buy your software, it’s equally important for your software company when seeking a majority investment or acquisition. Note, certain variables make it an opportune time now.

To meet your personal and business goals when selling your business, you must understand the role these elements play and be able to evaluate where your business currently stands within the broader context of M&A markets. Doing this enables you to determine how timing impacts your decisions to pursue a liquidity event and ensures you make the decision to sell at the right time for you and your software company.

This blog will guide you through the essential elements affecting market timing, helping you make informed decisions to maximize your return.

Current Market Conditions to Consider

Understanding the current market conditions is crucial for SaaS founders considering an exit. See the details that highlight why now is an opportune moment to pursue a liquidity event.

1. Market Activity and M&A Deals

According to our latest quarterly report, the total aggregate software M&A deals reached 823 in the first quarter of this year. This number is considered steady and strong by historical standards. Specifically, for SaaS, there were 486 deals in that quarter. This figure remains well above the pre-COVID 2022 levels, which marked a separate peak in deal volume.

2. Comparing Historical Data

Despite a slight lull in 2023, primarily due to regional bank instability, macroeconomic concerns, and a high-interest rate environment, the numbers are now on par or even better than the previous peak periods. This brief downturn was largely attributed to temporary economic disruptions.

3. Economic Forecasts and Future Projections

Looking ahead, several factors indicate a promising landscape for SaaS M&A activity. The Federal Reserve is expected to cut interest rates three times this year, which could stimulate further investment and acquisition activity. Additionally, with a solid forecasted economic performance, SaaS deal volume is anticipated to increase for the remainder of the year.

These positive indicators suggest that the current market conditions are favorable for SaaS founders considering an exit. High demand (explained in the next section), combined with strong economic forecasts, creates a fertile environment for achieving exceptional valuations and maximizing returns.

Investor Preferences in SaaS Targets

As of the second half of 2023, we engaged with PE investors and Strategic Buyers to understand their preferences in SaaS targets. The quick answer: SaaS companies with profitable growth and strong retention are in an ideal position to explore a liquidity event. These metrics are highly sought after by investors and strategic buyers, and there’s a notable shortage of high-quality companies that meet these criteria. This scarcity has led to demand outpacing supply, with investors expressing a willingness to pay premium prices for desirable targets.

4. Profitable Growth and Strong Retention

Not sure if your business is at the right stage to sell? Investors and buyers are particularly interested in SaaS companies that demonstrate:

Profitable Growth: Consistent revenue growth coupled with profitability indicates a sustainable and scalable business model. Companies that can balance growth with profitability are viewed as lower-risk investments with high potential for return.

Strong Retention: High customer retention rates suggest a loyal customer base and recurring revenue streams, which are critical for long-term stability and growth. Strong retention rates often translate to lower churn and higher customer lifetime value.

Other key metrics include over 90% Gross Revenue Retention (GRR), more than $5 million in Annual Recurring Revenue (ARR), and a Rule of 40% score of 40% or higher.

5. Market Demand and Scarcity

As mentioned, the current market is experiencing a shortage of high-quality SaaS companies that exhibit these desirable metrics. This scarcity has created a seller’s market, where demand significantly exceeds supply. As a result, investors are more competitive and willing to offer higher valuations to secure deals with companies that meet their criteria.

6. Increase in Buyer Interest

Our analysis aligns with these trends. In fact, we have observed a 118% increase in Indications of Interest (IOIs) from prospective buyers and acquirers in the trailing twelve months (TTM) of 2022 compared to 2021. This surge in interest underscores the heightened demand for high-quality SaaS companies and reflects the overall positive sentiment in the software and M&A markets.

For SaaS founders and CEOs, this means that if your company exhibits profitable growth and strong retention, now is an opportune time to consider a liquidity event. The market conditions and investor appetite are aligned to maximize your return, making it a strategic moment to explore potential exit opportunities.

Establish Personal & Business Exit Goals

Before knowing whether it’s the optimal time externally to sell your software company, you first need to identify your personal and business goals for the transaction. Recognizing the objectives you want to meet helps you determine the best time to sell your business.

As the founder or operator of your company, do you want to stay involved and run daily operations or move to a higher-level board position? If you plan on departing the business, do you have a succession plan in place?

It is also imperative to consider the business goals when determining when to sell your business:

• Do the shareholders want to restructure the cap table?
• Do they want to get more funding to help fuel the company’s growth?
• Consider how your management team is positioned and know if they want continued involvement with the business.

These factors help determine what type of transaction is best and the type of buyer that would be a good fit. You may find that you’re open to assessing a multitude of options after defining your personal and business goals.

Ultimately, developing an exit strategy well in advance allows you to define and prioritize what a successful exit means to you and your company. Having a clear succession plan in your exit strategy makes the transition period easier for founders as well as other company executives and employees, no matter the outcome. You can ensure you are meeting any personal goals in addition to the objectives your company hopes to achieve through a sale.

The Importance of Timing for Founders

Again: Timing is crucial when it comes to selling your business, which is why it deserves its own section to emphasize this important point. Much like putting a house on the market, waiting for the “perfect” moment can often lead to missed opportunities. Holding out too long can expose founders to potential risks such as market downturns, increased competition, or changes in industry preferences.

M&A Timing: Lessons from Product Launches & the Stock Market

Timing an M&A deal is as critical as launching a new product; hitting the market at the right moment can make all the difference in success. Just as a product launch needs to align with market demand and trends to maximize its impact, an M&A deal must be timed to take advantage of favorable market conditions and strategic opportunities.

Similarly, M&A timing is akin to investing in stocks; entering and exiting at the right time can significantly impact your returns. Just as investors monitor market fluctuations and trends to optimize their buy and sell decisions, CEOs must carefully consider the timing of an acquisition or sale to ensure the best possible outcomes for their business.

When to Sell Your Business: Our Answers to Your Timing Questions

While these factors are ones you can think through now, many more considerations not included here require the expert eye of a professional. If you’re a SaaS CEO or founder contemplating market entry, reach out to our analyst team. They will guide you through your company’s opportunities. As always, our conversations are confidential, and there’s no obligation to sign with us. Click here to get in touch with our team.