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Key Considerations for Selling an SMB SaaS Business

  • Why investors tend to prefer enterprise SaaS over SMB SaaS
  • How an SMB SaaS founder can highlight the strengths of their company to garner interest from investors

SaaS companies serving small to medium-sized businesses (SMBs) face an unfortunate truth—that compared to those serving enterprises, SMB SaaS companies are frequently seen as less attractive investment opportunities.

Why is this the case? A combination of factors contribute to this issue: lower switching costs, more customer churn, more competitors (including venture-backed, cash burning businesses), and more pricing pressure, among others.

Plus, many software buyers, particularly private equity firms, have seen lower returns and more competitive pressures from portfolio companies focused on SMB software. As a result, these investors have completely turned a blind eye to the space, rather than focusing their attention on select, exceptional opportunities.

So what is a founder to do? The key to running a successful sale or majority recapitalization for an SMB SaaS provider is to refactor the lens through which buyers interpret your company—from one calibrated to evaluating enterprise companies to one zeroed in on SMB SaaS.

The below insights provide more detail and demonstrate how an SMB founder can position their business as an exceptional investment opportunity in spite of the inherent challenges of being an SMB software provider.

Why Investors Tend to Prefer Enterprise SaaS

Investors usually prefer enterprise SaaS because the companies in this category tend to have high retention rates, high-profile customers, and highly customized and well-developed technology. These attributes together produce greater stability and predictability, which investors love.

SMB SaaS companies, on the other hand, tend to have:

  • A higher churn profile. For various reasons (including customers going out of business, ease of implementation, a lower price tag, a low-touch sales model, less proprietary deep technology, etc.), customers are more likely to churn in an SMB SaaS.
  • A large, unknown customer base. SMB SaaS providers can serve thousands to tens of thousands of customers, most of which will be relatively unknown companies and financially volatile. Compare that to enterprise software, where companies serve much fewer customers and each customer tends to be a large blue-chip company who is highly recognizable as a creditworthy, financially stable entity.

These challenges shouldn’t be unfamiliar to you as an SMB SaaS founder. But they also shouldn’t disqualify you from running a successful M&A or capital raise transaction—so long as you know where to focus investors’ attention.

Strengths of SMB SaaS to Highlight in a Transaction

The SMB SaaS model has strengths that enterprise SaaS does not. Teasing out these strengths is necessary to transact at leading ARR multiples.

Our team at Vista Point Advisors has experience positioning SMB SaaS businesses for sale across verticals and achieving strong ARR multiples. Based on that experience, here are some points to highlight to get multiple buyers excited and at the table.

Unique and efficient go-to-market strategies

A cost-efficient marketing strategy is a powerful message to share with potential investors.

To succeed in SMB SaaS, you have to identify and capitalize on the most efficient channels to market your products. Common marketing vehicles in SMB SaaS include:

  • Thought leadership
  • Content marketing & SEO
  • Referral/commission-based marketing
  • Channel and partner sales
  • Paid marketing through Google, LinkedIn, lead generation/software review websites (e.g. Capterra, SoftwareAdvice, G2)

The beauty of these channels is that they are highly cost efficient, so the unit economics for an SMB SaaS company can be highly attractive and profitable even for a customer of 1-2 months. LTV:CAC ratios can approach 100x for SMB SaaS businesses that use product-led sales.

Compare that to enterprise SaaS companies. With fewer potential customers and more expensive software, enterprise SaaS companies have to hire a BDR team and high-salaried account executives to make sales. As a result, their customers have to stick around longer to cover these costs. Hence the focus on retention.

A short sales cycle

The sales cycle of SMB SaaS companies tends to be fairly short.

Typically, a customer simply searches for software solutions for their vertical, compares features and pricing, and chooses a vendor. Or, alternatively, a customer hears about a vendor online, via ads, or through word of mouth. When they realize the solution would help them save time and money, they purchase and implement the software in the same day or week.

Having a short sales cycle is a two-edged sword. What comes in easily goes out as easily, but some of the benefits of a short sales cycle include:

  • The potential to grow faster with limited capital
  • More accurate attribution of marketing initiatives to new revenue
  • Ability to grow based on product-market fit and popularity, rather than expertise in building out a sales team
  • No large difference between contracted ARR and live ARR, which is typically seen in enterprise SaaS
  • Easy accounting

A high growth opportunity

Most SMB SaaS providers serve legacy sectors such as retail, hospitality, travel, field services, manufacturing, non profit, consumer goods, etc. By and large, these sectors have been slow to digitize their processes as many SMBs are family owned and run as lifestyle businesses.

That SMBs have been slow to adopt technology might seem to counter the argument that this market represents a high growth opportunity. But recent trends have increased interest among SMBs to digitize.

Over the past few years, and especially through the COVID-19 pandemic, companies have seen the need to move online and automate workflows, and they’re using software to accomplish the task. These new adopters represent a massive portion of the market, offering a long and steep growth curve.

Larger total addressable market (TAM)

SMB SaaS companies have very large markets to serve as a result of:

  • A greater volume of SMBs compared to enterprises
  • An increasing share of the market moving to digitize processes and invest in software

As a result, an SMB SaaS company’s total opportunity is much greater than that of an enterprise SaaS, which investors love to hear.

More frequent and easier upsell opportunities

One of the beauties of SMB SaaS is the ease of making incremental product improvements and then upselling your customers.

Product development cycles are comparatively short in SMB SaaS. And since most SMB SaaS providers are built on a public cloud (as opposed to on-prem or private cloud), pushing updates is quick and painless.

When an update goes live, upselling a customer is mainly a matter of sending out an email pitching the new feature. Because subscriptions are typically monthly (as opposed to annual) and managed by the customer, making a speedy upsell is relatively easy.

(Compare that to enterprise SaaS. Between a lengthy product development cycle, high price tags, and extended contract lengths, making a quick upsell is more difficult.)

Synergistic combination with strategic buyers that serve SMBs

SaaS companies that service SMBs in specific verticals are in a great position to pitch to strategic buyers who serve the same vertical. "Synergy" is the watchword of strategic acquisitions, and a shared vertical is one of the best frames through which to push that story.

Working with an Investment Bank to Position Your Business

The examples listed above are just some ways to position an SMB SaaS for potential buyers. Some of your strongest differentiators will be unique to your company and require experience to tease out and position as part of a cohesive story. For example, some (but not all) companies are in a great position to integrate payments into their platform as a way to layer processing fees on top of SaaS revenue.

One of the key roles of an investment bank is positioning your company’s story in ways that will answer the needs and questions of potential acquirers. While you may know your business and market well, an advising investment bank knows who buyers are, what they look for, and how to frame your business in the best light.

Learn more about the role of an investment bank in positioning your business.

Modified on Aug 02, 2021