Selling my SaaS: been offered $500k plus 3-year management contract. How should I respond?


24

My husband and I built a niche SaaS over the past 12 years...it was an idea way ahead of its time that is now catching on and attracting attention. For school districts, so our addressable market is about 15,000 and we have only 70 paying customers. We probably charge too little, our recurring revenue is $75k, basically all profit, but we doubled our customer base this year and the sales pipeline is stuffed. We do not advertise, aside from direct mail and targeted email.

The SaaS product has been on the back burner, selling a few per year, while we've been busy making decent money as custom programmers. Two years ago we started getting more inquiries, and we hired a part-time contractor to help with sales.

January 2012 we hired a full-time employee to sell and supports it (does a great job). Hubby is the programmer, we brought in a household income of barely over $100k this year between SaaS product and custom programming, because he's doing less "paying" custom work and more improvements to the SaaS product. We made a bet and cut our income short-term, and it looks to be paying off because in one more year we'll be over $100k in recurring SaaS, basically free money. Once we get schools onboard, they stay forever, we've lost one customer in 12 years! Customers love the product and gladly give testimonials and referrals.

Out of the blue, a huge corporation (you've heard of) wants to acquire us. Pretty sure their initial offer is a low-ball. $500k up front, and we become employees making $100k per year for minimum 3 years. They want the product but also our talent and innovation--their words, not mine.

So it's a "bird in the hand is worth two in the bush" scenario. We're profitable, 100% privately owned, literal mom & pop operation. The half-mill plus $200k family income sounds pretty nice--but on our own we could make $200k a year without breaking a sweat, and could remain self-employed, answering to nobody.

We can be bought, though, and are intrigued by the attention--but we feel the offer is too low, despite our low revenue.

So what would you do? We're planning to counter...but not sure what number to throw out there.

To make matters even more interesting, when seeking valuation advice a few weeks ago, I called a huge VC firm (their typical FEE is a million dollars) and even though we're far too small for their consideration, the guy was so impressed with our SaaS product he showed it to a colleague at a smaller firm...and they promptly called me and are considering making an offer as well.

Thanks in advance for taking the time to read this long post, and I look forward to your responses.

Saas

asked Dec 14 '12 at 12:51
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Jules
121 points
  • So how did this all turn out? – Dkroy 8 years ago

10 Answers


16

Let's make a calculation for comparison.

Option 1: Keeping the business

Your Revenue Per Year

  • 200k
Your Cost Per Year

  • 100k -- You still need to hire the developer to keep improving the site as that's your own business
Your Net Income

  • 100k
Option 2: Sell the business

Your Revenue Per Year

  • 100k -- The salary
  • 30k -- Assume you invest 500k and get a 6% annual return. Neglect compounding for simplicity

You Cost: 0

You Net Income: 130k

Sensitivity Analysis

  1. Case 1: The business life span ends after 3 years. 100K*3 VS 130k*3+500k. Option 2 wins.
  2. Case 2: The business life span ends after 10 years. 100k*10 VS 130k*10+500k. Option 2 wins
  3. Case 3: The business life span is 10 years but you get fired after 3 years contract expires 100k*10 VS 130k*3+500k. Option 1 wins slightly. Considering you can still work elsewhere in left 7 years. The result is not absolute.
Conclusion

So you may consider these factors for your decision.

  1. How would you estimate the life of the business? Not possible to fade in recent 10 years seeing technology evolve, competitor entering in etc?
  2. Is the business have good potential to increase? In my opinion it is not much seeing 70 customers in 12 years. But you know the best. Besides, how much resource you need to put to keep business competitive and grow?
  3. Do you have idea and ability for other projects in case you get fired by this big company? I think this is an important consideration.
Possible counter backs

  • Increase offer from 500k to ...
  • Ask for an equity share if you are confident at the business.
  • Do both
  • Others

My two cents for your reference. Hope you could find the framework helpful, not my opinions:)
answered Dec 14 '12 at 17:59
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Billy Chan
1,179 points
  • I think this is a freaking great response. – Christian 8 years ago
  • Awesome answer! – Mario Awad 8 years ago

7

It's not money that makes happiness, it's happiness that makes money. It's the happiness you've had working and building your business over the years that is now potentially transforming into money.

I think too many people look at this from a financial perspective. Look at where you are in life: you're independent, doing something that you like and starting to feel the reward of years of hard work. How many people do you think are in that position in life? If you get acquired, you will lose your independence, become an employee and, after a few months of the money sitting in the bank, you will probably feel that your years of work were cheaply bought and wasted. Now how many people do you think are in that position in life? Imagine selling now and then living in regret, thinking that you could be building your business instead of being an employee.

Entrepreneurship is about business, money and many other things but perhaps most importantly, it's also about having a great life doing what you want.

If you've been offered an acquisition, it means you've really got something worth something. Unless you plan to retire, why not grow it yourself? You could use the acquisition offer as a tool to attract investors and start by raising 500K to hire 2-3 sales people and 1-2 programmers. You'll be able to grow your business (since the product is already validated by the market) and over time, you'll probably end up feeling better about what you're doing than if you sold business now. And eventually, you might end up selling the business anyway, but for a lot more!

answered Dec 15 '12 at 01:03
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Frenchie
4,166 points
  • Agreed, but you've also got to wonder if this other company could replicate the product with other programmers for $500K... – Dave Hilditch 9 years ago
  • That's been a risk all along. – Frenchie 9 years ago

4

Now that several outsiders have validated the quality and potential of your product, get more exposure to potential buyers. The more competitive offers you can solicit, the higher the overall bid will be.

answered Dec 14 '12 at 21:08
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Henry The Hengineer
4,316 points

2

Update: thank you everyone. We decided not to sell. My two-year plan is to keep bootstrapping and work to raise the valuation to at least $2 million. In the meantime the revenue from the product pays our bills. The up-front cash was enticing, but at what personal cost? Answering to no-one is a pretty sweet life!

answered Mar 22 '13 at 02:40
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Jules
21 points

1

A lot of great feedback above that I won't repeat. I will add only one comment regarding negotiating price, and that is if you want to up the bid you might ask them to put stock in their company on the table as well as the cash and employment. You might also negotiate options for their stock at the current market value, so you are essentially betting with them that their stock will go up. Much of the negotiating can be in the context of your employment agreement, including additional signing bonuses in the form of stock from the company. Also, don't be surprised to learn the company may be thinking of the $500K to be less about your product and more about signing bonus money to hire the two of you.

All of that said, let's look at the less discussed aspects.

Building Products versus a Business: It seems to me you have demonstrated you know how to build a product, but have not really had the experience of building a company. If another company (including your potential suitor) decides to copy the product and go after your market, you will have to fund the lawsuit to protect your intellectual property. Presuming you have patents (and since you didn't mention them you may not), a lawsuit like that can easily cost you $250K or more. Now you are out of the "self-funded business" phase and into the "pour money in to protect what you once had" phase.

Let them pay you to learn: You might enjoy going into MegaSuitor and seeing how they would build a business around your initial product. You will also see what a concerted effort by an established company can add to your product over the three years you will be there. These are phenomenal skills to have when you go build your next product and self-fund that into a mufti-million dollar business.

One trick pony: If this was one of a series of great product ideas you will have in your life, sell it and go see what MegaSuitor does with it. Spend every minute learning how they do everything at that scale, making contacts, and expanding your resume to be developers that can ride a product from prototype to MegaSuitor size products.

Other Projects One last caveat, and I will limit my advice because I want to STRONGLY recommend that you hire a local attorney to review any employment contracts you are offered: Make very sure you understand what you are prohibited from working on, such as potentially competitive intellectual property, while at (and after) working for MegaSuitor.

Sale or not - congratulations, you did a great job making a product that people seem to find useful!

answered Dec 21 '12 at 06:34
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On The Shelf
180 points

1

It depends on your priorities.

If it's all about what makes the most financial sense, you should be able to do some reasonable projections based on current growth and turn it into a maths equation.

If it's about lifestyle and enjoying what you do, and a big part of that is not answering to anyone, then the buyout needs to be a lot more to compensate that.

Either way, 500k sounds way too low. I would choose a price that you know 100% you are happy to accept and throw that out there. At least if they take it then you're happy, and if they don't you will likely just go to the next step of negotiation and hopefully a higher offer.

Disclaimer: I have never been in this situation, so this is based purely on opinion. I do have a SaaS business myself though and it's a scenario I have spent plenty of time considering. Personally, I don't intend to sell, I like what I do.

answered Dec 14 '12 at 15:20
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Joel Friedlaender
5,007 points

1

You should consider option 3. Counter with a $500K proposal for 60-70% controlling share.

This way you get $500K now, can pay off your mortgage or whatever and you get $200K annual family income.

From the sounds of it, your product is amazing and really just needs marketing and sales, which if they're willing to pay $500K for I'm sure they have planned in the pipeline.

This should be a fairly easy sale to convince them too as you can argue that by giving you a continued percentage stake it ensures that you won't get alienated or depressed when they start making millions from it.

It also looks better for future investors as the original founders are still around.

I would also suggest you demand a place on the board for both of you. After your 3 years, your remaining 30-40% will hopefully be worth > $1 million and you both should have no problems finding other companies to get involved with, straight into board level.

If I were you I'd be prepared to go lower in the percentage you retain too, but I wouldn't go for 3 years in the new business just as a salaried employee (i.e. without a stake).

Depending on how they're set up, the shares they offer you may be part of their bigger corporation and if you do the deal THAT way I'm sure you can negotiate a much higher fee for selling a smaller percentage. If it's going that way, it may be difficult to demand a place on the board but that's what you should aim for in my opinion.

answered Dec 14 '12 at 23:31
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Dave Hilditch
227 points

0

It would be best to figure out whether

- a merger is best,

- a joint-venture is best, or

- a fund-raise by selling minority equity stake, is the best step for you

Typically, out-of-the-blue offers can be below market price, sometimes well below market. After all, there are always more businesses available for sale, and smaller number of business looking to buy in most feilds of M&A. You may like to check if you are selling yourself short. A success fee of 2-3% to an intermediary may not be too costly, in the long run.

Disclaimer : We arrange mergers & acquisitions, joint ventures, PE, and other strategic transactions.

answered Oct 22 '17 at 10:41
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Amit Shukla
1 point

0

Thank you so much, everyone, your perspective is valuable and appreciated.

Billy: your framework was helpful, thanks. We planned to do something similar today. Is it alright if I make a few corrections to the numbers--for my own purposes, and so others can perhaps weigh in?

Option 1: Keeping the business

  • $100k from SaaS product, $100k from custom development
  • Cost per year: essentially zero. See note.
  • Net annual revenue: $200K. No growth because we're not investing in sales.
Programmer is my husband, we have one full-time employee doing the sales and support while I prop up our bottom line with custom programming revenue. In this scenario, we return to a 2-person company and both do custom development half-time and sales/support half-time. Option 2: Sell the business
  • It's $100k each, not total. Plus 15% bonus plan (whatever that means) and benefits.
  • Net annual revenue: $230K, plus $500k in the bank
Sensitivity Analysis: Case 1: 3-year business life span. Keep business: $600k to $2.3m
  • Outcome A: $600k A competing product kills our SaaS, and we're back to working full time programming, making $200k/year but with no recurring revenue stream and no product to sell.
  • Outcome B: $2.3m We continue squeaking by at $100k/year. At end of three years, we sell two established SaaS products (we have a complimentary product 80% done with enthusiastic beta-testers lined up) for $1m each, which seems conservative.
Sell business: $1,190,000
  • After three years, we leave company with impressive resume and start new company.
Case 2: 10-year business life span. Keep business: $2m
  • it could be worth $3+ million or zero at that point
Sell business and be an employee for 10 years: $2.5m assuming no raises
  • I am 40 years old and my husband is 50, so in 10 years we hope to be almost done working
Case 3: too many variables.
answered Dec 15 '12 at 01:23
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Jules
21 points
  • Jules, is the "keep business" option in Case 2 wrong? You mentioned you have two secret weapons which worth $1m each in Case 1. If that is true, I would definitely vote for keeping business. – Billy Chan 9 years ago
  • Just as a curiosity why create a different user to answer your own question? – Karlson 9 years ago

0

Some of the answers already point to the taking that offer as a investment rather than a selling it out 100%. So Just to sum it up:

  • your business is catching up these days, customer base is growing
  • you have two interesting parties to buy it out
  • you're have with the product
  • your product is there for 12 years already

What I would do is to push on sales and try to make a bigger revenue asap. It should not be to hard to do it since your pipeline is full.

Then ask for investment from the buyer (or VC) to grow it faster. Your exit could be huge just 2-3 years from now and you can go to the well deserved retirement.

Now, if you still wish to sell it now, would 500K made you retirement easy?
Aim at 1M and ask them to pay 1.2M so you can negotiate down.

answered Dec 15 '12 at 18:33
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Mojsilo
594 points

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