Risk and Reward: The Fundamentals of a Software as a Service Company Acquisition

Part I – Deal Structure

As demand grows, the software as a service (SaaS) business market is projected to continue to evolve and expand. In 2021, SaaS solutions are forecasted to generate over $120 billion in revenue. The COVID-19 pandemic has only accelerated SaaS growth by augmenting the demand for remote collaboration services. A transition to the cloud ensures business continuity during uncertain times.

“We see SaaS companies as a continuing focus of top searchers, and that has continued since the start of the pandemic. B2B SaaS tends to be very high-quality recurring revenue, of course, and so in many cases, SaaS companies were less impacted by COVID and consequently are more exciting as acquisition opportunities this year,” adds Aaron Perrine and Saumil Jariwala of Trilogy Search Partners, who both reiterate the continued focus on SaaS business models.

From a search fund perspective, there are several critical factors to keep in mind when identifying a target SaaS business to acquire. Scalability, security and flexible pricing structure for the customer are key components to a sustainable SaaS business model. To gain insight on what a successful SaaS acquisition looks like, and how to ensure success after the transition, we sat down with industry veterans and trailblazers. One of the biggest takeaways was to approach the acquisition with a fully baked strategy, starting with structuring the deal wisely. Set the tone for success at the onset with a strategic capital stack and thoughtful planning around elements like deferred revenue liabilities. Working in tandem with a SaaS-experienced lender like Live Oak Bank can ensure that search funders have the right financing in place for this specific business model. The lender on a SaaS acquisition should be well versed in the unique metrics of the industry such as customer acquisition costs, lifetime value, net and gross customer churn and the consequences of average sales price. “Generally, these aren’t ‘cash flow’ type investments, and the goal is going to be growth in subscription software revenue, so we just want to be cognizant of that as we advise searchers on how to finance their deals,” offers Perrine. Jariwala added, “A modest degree of leverage is great and can increase returns; at the same time, the new CEO may want to be able to make early investments in marketing and sales, technical debt, etc., so we just want to be sure that’s accounted for.”

Click the link below for the full article:

Live Oak Bank SaaS Whitepaper