This is the third post in a series on selling a software as a service (SaaS) business. In Part 1 I covered my motiviation for selling and how I got started with a business broker. In Part 2 I covered the work involved in preparing to sell, and negotiating with potential buyers.
Once I decided to sell to the buyer with the finance background, the broker did the final negotiations.
We agreed on a sale price that I thought was very fair. I agreed to a 4-month term where I would be available for questions or tech support for a few hours a week as needed. This agreement aligned with what I wanted for my customers, and would ensure the transition was smooth.
The next step was to draw up the The Letter of Intent (LOI). This document is a full description of the buyer’s offer and what I would provide in exchange: domain names, source code, mobile applications, and the transition support period. We used some online document signing tools to get that piece done quickly.
Next up was the due diligence phase, expected to last about 2 weeks, during which I could still entertain other offers, but would have a good faith intent of selling to the current buyer unless he backed out for some reason.
The broker set up an online document sharing workspace to exchange more financials (by now we had 2 more months of numbers to share), and generally verify that the representations I had made about the business were in fact accurate. Since I had been scrupulously honest about eveything, this part went very smoothly.
Most of the due diligence was just detailed verification of traffic, sales numbers, costs, and then accounting for how much time I was spending on things like support and maintenance. I also sent some code samples (the buyer was interested in code quality), and some detailed descriptions of the technology setup.
Towards the end of the due diligence period, the broker set up an online escrow account. This was to ensure a safe place for both the buyer and seller to complete the transaction.
For the seller (me), the escrow company would guarantee that the funds were real, and were available once the deal closed. For the buyer, it also added a level of confidence that he would get all of the elements we had agreed on. To formalize this, the escrow account had an “inspection period” that allowed the buyer to make sure all of the transfers had happened as expected (domain name transfer, source code, server passwords, etc.).
This is similar to a real estate transaction, except we mainly exchange bytes instead of property. We were set to close the deal on the 30th of the month.
I woke up early that day, eagerly waiting for the notification that escrow had closed, but nothing came.
I reached out to the broker who informed me that the buyer had some trouble arranging funds, and needed another 10 days before close. Bummer. But at least I knew he was still commited.
Ten days later, the transaction finally went through. The online escrow company wired the funds straight to my bank account. Woo hoo!
After paying the broker fees (15% of the sale price, which I thought was fair, given that they brought all of the buyers in), I was grinning from ear to ear.
It felt amazing to have a significant chunk of money in my account - a healthy six figure sum - more than I had ever had at one time. But it felt equally great to know my customers would be taken care of, and I could stop feeling guilty every day that I wasn’t working on a backlog of features.
And I was also feeling good that I wouldn’t be letting something I had put 6 years of effort into slowly crumble from a lack of updates.
To turn something that had been a constant source of stress and guilt into a big lump sum in my bank account was like some sort of magic trick. I imagine it must be how a lottery winner would feel, except there wasn’t as much luck involved in this outcome.
After the sale, I had expected to spend at least a few hours a week helping with customer support, and answering technical questions, but I spent probably fewer than 20 hours over the entire 4-month transition period.
Part of that was because of the stability of the software, and some reasonable systems I had in place already, but a big part was that the buyer wound up arranging part-time technical help to support customers, deal with billing issues, make minor changes to the software, and deal with system administration. I learned later that this was something the broker was able to supply. This worked wonderfully from my perspective, and really made things much smoother than they might have been otherwise.
It has now been 2 years since the sale. I am thrilled that ClientSpot got a new lease on life, and both the buyer and I got what we wanted out of the transaction.
I also learned some valuable lessons that I will bring to every future venture. Here are my biggest takeaways:
- Choose a market and a type of customer that you are passionate about, and can imagine working with for a decade or longer. You can switch directions, products and consulting opportunities, but it’s much better if you are serving the same types of customers. You can continue to learn and grow in the market and get deeper and deeper insights over time.
- Once you’ve reached critical mass of at least a few thousand a month in revenue, and at least 25 customers or so, you have options. I didn’t know that when I started.
- 18 months to 2 years is about the shortest reasonable timeframe to consider selling an online business. Less than that, and buyers question the trajectory, the sustainability of revenue, churn, customer lifetime value, etc. You could sell sooner, but not at the valuation you might otherwise get.
- The best time to sell something is while you are growing predictably (even if it’s slowly). I sold during a long plateau period - solid, but very little net growth.
- The most important metric in an established SaaS business is churn (percentage of customers you lose each month). If you can keep customers longer, you grow revenue faster, spend more on acquisition, and you are utimately worth more to buyers.