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December 7, 2017

Key Questions to Consider Before Marketing a SaaS Business

MHT Partners  | Business & Information Services Investment Bank

The investment environment remains favorable for software as a service (“SaaS”) companies, leading many shareholders to consider raising capital, selling or recapitalizing (collectively, a “Transaction”) their business. There are many factors involved when deciding to pursue a Transaction. Despite the complexity, shareholders need to consider three critical questions before embarking on a Transaction.

How well can you present (and defend) the metrics or Key Performance Indicators (“KPIs”)?

It’s time to prepare your SaaS alphabet soup (LTV, CAC, ARPA, MRR, ARR and NER), and add a touch of the Rule of 40, Bookings, Billings, and Churn. SaaS KPIs will be in full display in any Transaction, and as a result shareholders will need to know these metrics inside and out. Potential investors will investigate SaaS metrics very carefully, with a specific focus on how each KPI is defined, and how it has trended over time.

Shareholders will have to present and defend these metrics exceptionally well if they want to achieve a premium valuation. If metrics have trended well, explain the factors that will continue the momentum. If metrics have deteriorated, be ready to explain what happened and what will enable a turnaround. If the latter has happened, proactively addressing any softness in these metrics allows the shareholders to “control the message.”

How satisfied are the employees?

It’s challenging to hire and retain top talent, and investors in SaaS businesses know this all too well. Investors are increasingly paying attention to employee sentiment, turnover and company culture. Employee review sites like Glassdoor make it even easier to gauge satisfaction. If potential investors see overwhelmingly negative sentiment, they may try to negotiate a lower valuation or, even worse, pass on the opportunity entirely.

Shareholders should empower and incentivize their management teams to foster a culture where employee satisfaction is closely managed. Measures of strong employee sentiment should be highlighted to potential investors, and any shortfalls should be proactively addressed.

Does the management team plan to stick around?

When control of a business changes hands, some management team members may want to leave and others may want to stay. It’s essential for shareholders to assess each senior manager’s commitment to the company post-deal. Having high-performing management teams commit to stay, preferably with equity remaining in the business, is often viewed by potential buyers as a significant plus.

Conclusion

Planning can go a long way, and the same can be said for a SaaS Transaction. Proactively addressing metrics presentation, employee sentiment, and management team retention will go a long way towards ensuring a smooth Transaction.

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