Entrepreneur & Investor.
Entrepreneur & Investor.

A Sneak Peek Into How I Approach SaaS Acquisitions

4 minute read

For those who follow me on Twitter, you may have noticed that I’ve recently teamed up with Bloom Venture Partners to launch a buyout vehicle. I recently did a short interview describing what we look for in a SaaS business.

As I grow and diversify my investment portfolio, I’m looking to add more private businesses to it. Partnering with Bloom Venture Partners allows me to do just that since we have the joint belief that there’s a lot of opportunity in acquiring small software companies.

In this post, I’m going to share my high-level deal notes with some napkin calculations. If you’re an accredited investor and interested in getting access to full notes on all of Bloom’s deals, click here to apply.

Let’s jump right into 2 potential deals that we reviewed recently.

Deal 1 – Workflow Software

Background

The first deal is a 20-year-old software company. That’s right, 20 years of operating history – basically a dinosaur in the world of software & tech. The software helps media teams manage workflow and quality control. The company started as a father + son duo, and the father has since retired. The son was looking to sell the business to move onto something new.

The product, functionally, worked really well, but the user interface was outdated and in need of a refresh. This presented the perfect opportunity for Bloom to takeover, invest in a legacy business only requiring a UI update, and continue to grow the business at a profitably modest rate.

The Numbers

This deal would have been financed using a combination of equity investment, senior debt, and seller take-back. The high-level deal numbers are as follows:

  • Annual Recurring Revenue (ARR): $780k
  • Annual Earnings: $390k
  • Offer Price: $1.5m
  • Equity Investment: $450k
  • Target ARR YoY Growth: 5%
  • Target Valuation After 5 Years (3.5x ARR) : $3.5M
  • Internal Rate of Return: 50.7%
  • Cash on Cash Return: 7.8x

Why We Liked This Deal

The software is mission-critical for media teams, making the revenue predictable. This was proven by an incredibly low churn rate and several years of steady revenue. Most of their customer-base was large enterprise companies with high switching costs.

There were clear value drivers present such as:

  • A small investment into improving UX
  • Use offshore labour to reduce overhead (their current team employed in a high-cost jurisdiction)
  • Increasing prices and adding more pricing tiers
  • Expanding geographically

These points alone would have driven a conservative 5% YoY growth. The industry was mature, making growth rates low but predictable.

The Outcome

We went back and forth with the seller on the terms of the deal. They had multiple offers, and in the end, they decided to take another offer. Our offer was actually higher than all competing offers, but our terms didn’t match with what the seller was looking for.

Second Deal – Compliance Software

Background

The second deal was compliance software in a niche and highly regulated industry, which made it easy for companies to comply with government regulations. The software was simple to use and had grown in popularity in the specific location where the founder was based.

Unfortunately, the founder made an unfavourable deal with a royalty partner, to whom a large chunk of the revenue was going to, in perpetuity. This demotivated the founder to scale the company and consider selling it to get out of this crappy deal.

The Numbers

This deal would have been financed using a combination of equity investment and seller take-back. The high-level deal numbers are as follows:

  • Annual Recurring Revenue (ARR): $360k
  • Annual Earnings: $133k
  • Offer Price: $500k
  • Equity Investment: $350k
  • Target ARR YoY Growth: 20%
  • Target Valuation After 5 Years (3.5x ARR) : $3.1M
  • Internal Rate of Return: 54.7%
  • Cash on Cash Return: 8.9x

Why We Liked This Deal

Not only was the software mission-critical, but it also had high switching costs. Businesses in this industry we’re effectively locked-in after configuring their compliance software. The founder worked tirelessly to get the software he created approved and integrated with the government API. Motivation to end the royalty agreement with an early partner created the perfect opportunity for Bloom to take over and continue scaling this business.

There were clear value drivers present such as:

  • Re-branding the product (the founder didn’t have marketing prowess)
  • Use offshore labour to reduce overhead (their current team was employed in a high-cost jurisdiction)
  • Increasing prices and adding more pricing tiers
  • Geographical expansion

The above value drivers in combination with a rapidly growing industry were more than enough to drive 20% YoY growth. The industry this business is in is rapidly expanding and will continue to grow.

Overall, we were impressed at how far the business had grown in a short amount of time. We would’ve loved to acquire this business and help the founder out of his unfavourable deal.

The Outcome

Within 7 days of being introduced to the founder, we made an offer. Although our offer was much lower than what the founder expected, it was fair based on the company financials. Not getting the number he originally had in mind, led the founder to turn down our offer.

Final Thoughts

These two potential acquisition deals thought us two things:

  1. The terms are just as important as the final offer
  2. Overcoming ‘perceived value’ (especially for founders that are invested in their craft/creation) can ultimately impact an offer

Along with my team at Bloom Venture Partners, I’ll be analysing a handful of deals each week. The above are just an example of the most recent two. If you are an accredited investor and would like access to more detailed notes on all of Bloom’s deals, you can apply here.

If you know someone that might be interested in selling their SaaS business, Bloom has a scout program where you can earn a cash commission!

Stay tuned as continue hunting for fantastic opportunities in SaaS!

DISCLAIMER: This blog post is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.


Hi there! I’m Jay Vasantharajah, Toronto-based entrepreneur and investor.

This is my personal blog where I share my experiences building businesses, making investments, managing personal finances, and traveling the world.

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