Converting a strongly recurring software business to true Saas

February 10, 2021

by a searcher from Harvard University - Harvard Business School in Fort Wayne, IN, USA

Has anyone ever done this? The business is selling for a software multiple, but all their customers and 80% of the revenue is recurring every year (and all based on a software platform). Is there some magic moment when it's no longer software and now Saas? Is this truly an arbitrage opportunity or am I missing something? Thank you!

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Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

I have done this before. There are two ways to do it. Option A is migrating customers from on-premise to a true Saas product.. This is really hard but possible with the right pricing strategy and assuming there is customer lock-in and the market is not hyper competitive. In most cases, you have to re-write the product which is expensive and will easily take 1-2 years. Then, another 3-5 years to migrate customers. So, it is possibly but mostly not done by PE buyers because of the cost and time investment needed. Option B is converting maintenance customers to subscription licenses. This typically involves offering customers the same pricing, an incentive to switch (e.g. new and better version is only available with a subscription license), and some new functionality that is delivered via the cloud. This strategy can be executed in 2-3 years. Valuations for subscriptions software companies are not quite at SaaS levels, but still presents an arbitrage opportunity.

Reply by a searcher
from State University of New York at Binghamton in New York, NY, USA

So is the current software on premise and charges via a license & maintenance fee (recurring revenue)? SaaS= software as a service and is cloud based software.

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