If you run a SaaS business, there are plenty of great reasons why you might want to sell it one day. Whether you’re looking to take some chips off the table or move on to the next project, it can often make a lot of sense.
If you are thinking about selling, you’ll find that there is no shortage of resources on how to value a SaaS business and how to go about selling it. However, there’s not nearly as much emphasis placed on the merits of holding on to a SaaS business and going the distance.
As someone who’s run a SaaS business for the past 5 years and someone who’s participated in a few acquisition talks, I’ve grown to appreciate some of the benefits of maintaining ownership. As a result, I thought it would be interesting to present some of the reasons why you might NOT want to sell your SaaS business.
Now, my goal here is not to convince you to never sell your business. In fact, I think it’s important to operate your business as though you could sell if you wanted to.
Rather, my goal is simply to point out some of the things you might not be thinking of. That way, you can make a more informed decision about whether or not it makes sense to sell your business after considering all of your own unique circumstances.
I also want to point out that for the sake of this post I’m mainly talking about “financial acquisitions” where buyers are typically offering 3-5x multiples of annual seller’s discretionary earnings (SDE). If a strategic buyer comes along and offers you a crazy multiple for your business, then you should probably take the deal.
With that out of the way, here are some of the reasons you might not want to sell your SaaS business.
1. You’ll probably leave money on the table
Back in 2017, I met a fairly well known marketer and founder who’s acquired a few SaaS apps and grew them into highly profitable businesses. After chatting with him for a while, he mentioned that if we were ever considering selling Snappa to let him know.
At the time, we weren’t actively looking to sell Snappa but I was curious to find out how they would value our business and what valuation he’d be willing to pay.
After sharing some of our metrics and describing how we ran the business, him and his business partner passed on making an offer. He mentioned that they couldn’t find any low hanging fruit and felt that acquiring it for more than a 3x SDE multiple would leave them with little margin of safety. At the time, we were only doing $33k in monthly recurring revenue (MRR) so even if we had sold for a 5x multiple we would have left significant money on the table.
Fast forward to the spring of 2019 and we received an email from a potential acquirer who’s been very interested in Snappa over the past few years. Every time he expressed interest in buying Snappa, I politely declined and said we didn’t have much interest in selling given the growth trajectory we were on.
This time around, he seemed very motivated to make a deal and was throwing around multiples on the very high end of what a financial acquisition would typically go for. After sharing our metrics and opening up the books, he made a very attractive offer which kicked off due diligence from the both of us.
Long story short, some issues cropped up during the deal and we ultimately pulled out of it. The good news is that it ended up being a huge blessing in disguise and completely changed my thoughts around selling our business.
Bringing it back to financials though, we again would have left a lot of money on the table had we sold. While we were negotiating a sale price, Snappa was generating $67k MRR. Today, Snappa generates $134k MRR, which is exactly double what we were generating just a year and a half ago!
More importantly, Snappa has gotten even more profitable as we’ve continued to spread more revenue over fewer costs. To put this all into perspective, we could probably sell Snappa for 2.5x more today than we could have back in the spring of 2019.
To illustrate this even more clearly, here’s a graph showing our all-time MRR and when these potential deals were being discussed.
You can see that our business has grown consistently over time and that selling it at any point along the way would have been a mistake. Although this post suffers from survivorship bias and our growth has accelerated due to the coronavirus, it is not uncommon at all for SaaS businesses to continue growing for many years. After all, this is the biggest benefit of starting a SaaS business; it might take a while to get going but once you’ve got product/market fit they usually keep compounding.
The ultimate point I want to make is this:
If your business continues to grow (even modestly), it will never make sense to sell it for a 3-5x SDE multiple, strictly from a financial standpoint.
The only caveat here is whether or not you can deploy the sale proceeds into another project/investment that will yield an ever higher rate of return than your current business.
It’s also worth mentioning that if your SDE gets high enough, holding out for the sake of more money becomes less important. If you net $3M – $5M after-tax from the sale of your SaaS business and park the proceeds in an index fund, a safe withdrawal rate of 4% would give you $120k – $200k of income. This would essentially give you an infinite runway if you really just want to move on to the next thing.
2. You’ll lose a reliable income stream
When you’re thinking about selling your business, visualizing a huge chunk of cash in your bank account sounds very appealing. If your SaaS generates $25k of SDE per month, you could sell it for somewhere between $1M – $1.5M.
Aside from the large tax bill you’ll have to pay, there are other issues with trading a reliable income stream for a lump sum of cash…
Without an additional income stream, you will need to dip into that $1M in order to pay for your living expenses. If you don’t get another project off the ground in a reasonable time frame, you will then start depleting your savings.
The other problem is that cash in your bank account will continue to rot and lose purchasing power every single year. And with interest rates currently pegged at 0%, you’ll be forced to invest this money in the stock market (or bitcoin) just to keep up with inflation.
Now imagine if you sold your SaaS business back in February 2019 and you parked your money in an S&P 500 index fund. Just one month later, $1M would have decreased to $672k. How would that make you feel? Would you have stomached the volatility?
Fortunately, the markets have rebounded very quickly (mostly thanks to QE + stimulus), but the S&P 500 is currently trading below the February 2019 peak. This means that, financially speaking, you’d be worse off today than you would have been when you sold your business.
In my case, short-term volatility doesn’t bother me at all when it comes to investing. When the market crashed in March, I watched my portfolio of high growth tech stocks get crushed along with my personal investment in bitcoin. However, I didn’t panic or make any rash decisions because I don’t rely on these investments to pay the bills or perform in the short-term. Thanks to this patience, my portfolio has not only recovered, but it has significantly outperformed the broader market this year.
One of the reasons I was able to remain calm is because I have a SaaS business that kicks off reliable cash flow. This allows me to focus my investing on highly attractive long-term opportunities without worrying about short-term volatility. So far in my investing career, this has worked out very well.
If we had sold Snappa and I needed to protect my nest egg, I likely would have changed my investing approach to something more conservative in order to avoid big drawdowns. This would have put me in a much worse position than I’m in today.
3. Acquisitions can be distracting
When selling a business, something that often gets overlooked is the time, resources, and mental energy that’s required during the process. Depending on the size and complexity of the deal, you may need to dedicate the majority of your time over several months to ensure that the deal closes. If you want a detailed account of what this can look like, I really enjoyed Rob Walling’s account of the Drip acquisition.
Every hour that you spend on acquisition talks or due diligence is an hour that you’re not spending on growing your businesses. Also, the further down the process you get, and the more time that you sink in, the more demoralizing it becomes if the deal doesn’t close.
Another thing worth considering is how you choose to communicate with employees. Obviously, you don’t want to tell your employees about an acquisition at the LOI stage when the buyer hasn’t done the full due diligence. However, as part of the due diligence, or as the deal approaches closing, you may need to loop in some of your key employees. If the deal doesn’t go through, your employees could then get spooked and start looking for opportunities elsewhere if they think you’re going to sell the company.
4. You’ll have to say goodbye to your team
Speaking of employees, building an amazing team has been one of the most rewarding parts about being a founder. It truly is a joy to work with every single person on our team. Although we only hired our first employee in 2016, I’m happy to say that not a single person has left the company.
In addition to all the time we’ve spent working together remotely, we’ve also had some amazing in-person experiences and created lasting memories that I’ll never forget. For these reasons, it would be really hard to say goodbye to all of the great people that I work with.
From a business perspective, ‘A’ players are also worth their weight in gold and are not easily replaced. Given the inherent leverage embedded in a SaaS business, a programmer or marketer who’s 2x better than their counterpart can realistically provide 5x better returns for the business.
If you sell off the business and have to start over, you may have trouble finding the same level of talent that you currently have.
5. Starting from scratch is hard
Early on in my SaaS career, I really took for granted how quickly we got traction. As soon as we put up our paywall, we went from $0 – $10k MRR in 5 months. When you spend a lot of time listening to podcasts and reading blog posts about the success of bootstrapped founders, you begin to think that this is the norm. In fact, I even thought that our growth was slow since I know plenty of people who grew faster than us.
It wasn’t until I connected with more founders and spent more time on Twitter that I realized just how difficult it is to get traction with a SaaS app. As I laid out in our co-founding story, we were fortunate to catch a few lucky breaks that we took advantage of. This enabled us to funnel existing traffic into Snappa, which made it much easier to get traction.
Although my skills as a marketer and founder are much sharper today than they were 5 years ago, there’s still no guarantee that if we launched another SaaS app it would take off the same way that Snappa did. If anything, I feel like it’s getting harder and harder to launch a SaaS app as more and more competition comes into the space. It feels to me like most of the obvious opportunities have already been exploited so you either need to come up with something completely new (always very difficult) or you need to be ready to take on fierce competition in the space that you’re interested in.
Because of this, I personally would have a hard time selling our current business unless we had another project that already had traction or the valuation was too good to pass up.
Alternatives to exiting
The motivation to sell a business usually comes down to money or the desire to start something new. Assuming those are your reasons for selling, I will offer two alternatives.
1. Remove yourself from the day-to-day operations
Now that we have a great team in place at Snappa, I spend very little time in the day-to-day operations. Most of my time is now spent on high level growth initiatives and guiding the ship. As a result, I have more than enough bandwidth to work on other projects while still running Snappa. In fact, Marc and I are currently working on a side project.
If you don’t want to have any involvement whatsoever, another option is to hire a CEO or operations manager to run the company. This way you can maintain full ownership of the business without needing to do any of the work.
2. Sell part of your ownership stake
If you really want to take some chips off the table, consider selling part of your ownership stake instead. This allows you to lock-in some gains while still leaving you with plenty of upside if the business continues to grow.
Using a famous example, the founders of Basecamp sold a minority stake of their business to Jeff Bezos. This is what DHH said about the deal:
“What Jason and I got from the deal was the total confidence to go the distance. In 2006, we’d only been running Basecamp for a few years. We’d been besieged by venture capitalists and acquisition sniffers. But Basecamp wasn’t actually making that much money yet. Profitable, yes, but modestly so.”
He goes on to say:
“We had a good thing going, and we had no interest in giving it up. But at the same time, it seemed prudent to hedge the bet at least somewhat. It was entirely possible that Basecamp could have petered out, and we’d been back to doing consulting with no residual to show for it.”
This sounds like a great deal to me. The cash infusion from Jeff helped the founders of Basecamp sleep better at night and enabled them to build an incredibly profitable business that is still thriving today.
Obviously, most of us are not going to have the great fortune of having Jeff Bezos buy shares of our company. If you don’t have anyone in your network interested in making this type of deal, you can look into a company like SureSwift Capital who are open to buying minority stakes in small SaaS businesses.
Funny enough, a friend of mine recently sold his SaaS business because he was worried about a large competitor who was about to enter the market. After the deal closed and the business kept growing, he mentioned to me that he probably should have kept a small stake in the business so that he could continue to participate in the upside. Again, a huge chunk of cash upfront always seems appealing but is often not as great as a decades long income stream.
As I mentioned in the intro, the goal of this post is not to try to convince you that you should never sell your business. There are always risks that you’ll need to take into consideration and exiting could be the ideal outcome in certain cases.
That being said, I hope that I’ve presented valid points that will cause you to rethink the narrative that exiting is the way to go. After going through a couple acquisitions talks myself, and having the benefit of hindsight, I realized that I would have deeply regretted selling our business.
It is now my belief that maintaining ownership will almost always make more sense than selling to a financial acquirer.