Profitable Strategies to Build a Sustainable SaaS Portfolio

Buying one SaaS business is a challenge. Buying and maintaining multiple SaaS businesses is an exceptionally difficult one. With an M&A failure rate of up to 90%, many entrepreneurs end their acquisition endeavors after only one procurement. 

A while ago, I gave a presentation on acquisitions at Dan Martell’s SaaS Academy (which I highly recommend applying to if you’re stalled out on hitting that next level of SaaS growth). During the presentation, I asked the audience how many people had considered buying a business. A lot of hands went up.

This made sense. A lot of entrepreneurs consider buying a business at some point in their careers. Maybe they’re looking to buy a traffic source and optimize it. Or perhaps they want to buy a competitor, or a complementary business. Maybe some are simply looking to diversify their revenue. There are many reasons to acquire another company.

Next I asked people who’d actually completed an acquisition to keep their hands up. A lot fewer hands were up.

Finally, I asked people who’d done this more than once to keep their hands up. No hands stayed up.

That’s probably because buying businesses is really difficult, and most people only wind up wanting to do it once.

I often get asked about what it takes to buy a SaaS business. Today, I'm sharing the same advice I gave to the SaaS Academy audience — whether you’re thinking about buying one business or 100.

Let’s get started.

Table of Contents

• 7 tips for optimizing your SaaS management strategy
  
  • 1. Be dedicated
  • 2. Be thorough
  • 3. Be disciplined
  • 4. Be flexible
  • 5. Be a CEO
  • 6. Be selective
  • 7. Be cool
• Tactics for optimal SaaS portfolio management, one acquisition at a time
  
  • Using your own money vs. raising a fund
  • Ensuring that you have the capital
  • Buying your first business
  • Finding potential SaaS acquisitions
  • Determining your approach to valuation
  • Developing your transition checklist
• Conclusion

7 tips for optimizing your SaaS management strategy

Making a Saas investment is a big deal, so how you show up for it counts.

Anyone who’s bought one SaaS business knows this, but if you’ve never done it before, it’s easy to assume that you’re simply trading cash for revenue. In reality, it’s just not that straightforward.

You’re not setting a new compensation plan for your sales team or adding a new feature. Deciding to acquire a business is a significant strategic decision, and as with most of life’s big decisions, how you approach it will make a big difference in the final outcome.

More important than any list of tactics (though we’ll cover a few for those who prefer checklists), here’s what I believe it truly takes to successfully acquire a business.

1. Be dedicated

If you’re using your capital to buy someone else’s business, you can’t treat it like a side project, and you shouldn’t delegate it to someone else on your team, even if it’s someone you trust. The acquisition needs to have your full attention for at least the next quarter — perhaps even the next two or three.

2. Be thorough

It’s important to do your due diligence in understanding all the details of the business you’re acquiring. In addition, you must also be thorough in your decision-making process.

What are all the options you have in acquiring a business? Are you looking for something that’s strongly connected to the SaaS companies you already manage? Or do you want something completely different to diversify your revenue?

3. Be disciplined

Your first opportunity isn't likely to be the best one. It’s important to be ready to walk away if your criteria aren’t met. Maybe it’s the wrong fit, the wrong price, or you just come to the conclusion that it’s not going to work.

Those are all fairly normal reasons that arise during a business evaluation. In acquiring 30+ businesses, I’ve personally looked at over 3,000. Don’t rush into making an acquisition without taking the time to not only make informed decisions but also to ensure that the business is an exact fit for your portfolio.

4. Be flexible

There are frameworks, valuation models, and checklists for buying a business. But that doesn’t mean there’s a qualified rule book you can blindly follow that will lead to success.

If you’ve ever experienced an exit firsthand, you understand that selling a business is immensely stressful for the founder, even in the most favorable transactions.

It’s a huge decision for them to sell when they’ve built the business from scratch, and they’re wholly invested in the product, the customers, and the team.

So it’s paramount to have flexibility in your terms, your timing, your communications — in everything — to take some of the stress out of the equation for them.

The reason for this is because you want more than just a done deal. You want to be able to reach out with a question 6 months (or 6 years) down the road, and get the same flexibility and consideration back from them.

5. Be a CEO

There’s no such thing as passive income. You need to be ready to run a business, think about how you’re going to maintain it, grow it, and take care of its team and its customers every day. If you think revenue’s going to continue pouring in every month without doing those things, you’re being unrealistic about how SaaS management works. 

6. Be selective

This one’s pretty simple. If you get a bad impression from a founder for any reason, walk away. If they seem questionable, there’s a strong chance that you’ll uncover some setbacks when you start running their business. 

To reiterate: your first opportunity probably isn’t your best opportunity. In fact, I could revise this to say without hyperbole that your first hundred opportunities probably aren’t your best. 

7. Be cool

Business is difficult, and it brings out both the best and worst in people. Work hard to be the person your dog (or your kids, or your partner, or your parents) thinks you are.

“In our deals, my goal is to have a relationship with that founder for life, and I want it to be a good one.”

Tactics for optimal SaaS portfolio management, one SaaS app at a time

Using your own money vs. raising a fund

Starting with your own money will give you ultimate control. If you want to grow faster, you can layer on a conservative level of debt. Taking on debt adds risk, but it allows you to gain some experience without relinquishing any equity or control to LPs. If you want to expand more rapidly and ambitiously, you might consider raising a fund. If you choose this route, you’ll need a clear differentiator to distinguish yourself from the dozens of other investors pitching with the same intention of acquiring a portfolio of SaaS companies. It will also be easier to raise a fund if you already have some successful deals under your belt.

Ensuring that you have the capital

If you don’t have the capital to buy a business, don’t make an offer. It’s unacceptable to misrepresent your funding situation. So if you’re still trying to secure funding from investors, you need to be crystal clear about that, because most founders aren’t going to accept an offer in that scenario, and they deserve transparency.

Don’t be the buyer in this story. Josh Pigford of Baremetrics shares how a $5M deal to purchase his company fell through.

‍Just ask Josh Pigford of Baremetrics who was ghosted by a buyer mere days from closing, when it was revealed that they didn’t actually have the funding to buy his company. The SaaS founder community is close-knit, and word about situations like this spreads quickly. Don’t risk damaging your reputation before you get the chance to step into the SaaS arena.

Buying your first business

Like anything else, your first acquisition will be the hardest. No one knows who you are, and you don’t yet have a reputation as a buyer.

If you’re looking to get into the acquisitions business, you have to build your brand and reputation on how you transact with your first few acquisitions. You want to be the kind of person who can:

• Buy with cash
• Close quickly
• Take care of the company’s customers
• Make sure there’s a solid on-boarding process
• Provide opportunities for the business’s team

Each of these tactics will define your brand. They act as your guarantee. And if there’s a host of people who all provide confirmation that your guarantee is legitimate, that holds weight in the SaaS acquisition industry. Networking is great (and necessary), but results build relationships faster than networking.

Finding potential SaaS acquisitions

In the beginning, since you won’t have a reputation as a buyer, you're likely to have to source deals from brokers. Here’s how to spot a qualified candidate:

• They fully understand the businesses they broker
• They’re responsive in their communications 
• They hold a good reputation and strong references

You’ll also want to develop some criteria to identify potential acquisition targets. There’s no definitive bullet list of criteria, because your targets will differ depending on the type of business you’re looking to acquire and the reasons for acquisition. Even so, it’s essential to have a list. 

Determining your approach to valuation

Different niches (consumer apps, B2B SaaS, eComm) require different formulas. Different buyers assign varying valuations to companies due to their distinct capabilities. Know yours, and value the business accordingly — with an eye to market prices.

And remember our previous point regarding maintaining flexibility. If someone asks for just a little over your valuation, that might not impact your bottom line very much, but it might mean a lot to the founder. However, if they want $2 million for a $20k MRR business? It may be time to exercise your discretion and “be selective” instead.

Developing your transition checklist

Part of your deal will require you to build a transition timeline and responsibilities. At the bare minimum, you’ll need:

• Comprehensive account access information for all business-related platforms and services (support and sales email accounts, social accounts, analytics, service platforms, etc.)
• An understanding of how the code works and a resource to manage it, whether that will be you or someone else.
• Transfer of IP and business ownership
• A well-defined agreement outlining responsibilities both pre-sale and post-sale. This includes day-to-day operations and the transition period after the founders' departure. Failing to establish this clarity will leave you at a significant disadvantage.

(For those on the exit side, here’s our list of everything a founder should have ready if they’re thinking about selling their SaaS company. This can also be used to help spot a founder who’s got their act together.)

A good acquisition requires a lot more than just cash. Though the capital is a necessary part of the equation, it’s just the beginning. Developing processes, being dynamic and adaptive, and having the team resources to properly transition and run the business will be the biggest contributors to your success.

‍Conclusion

While buying revenue may be easier than building it from scratch, maintaining and growing that revenue over time may bring greater challenges. There are many potential pitfalls that can present themselves during the sales process, especially for those who haven’t purchased a business before. That’s why it’s important to have a solid acquisition strategy in place before you invest in building out your portfolio with SaaS companies.

Use diligence as you work to understand the intricacies of each SaaS company you acquire. Thoroughly evaluate financial health, operational efficiencies, and market position. Be prepared for unexpected setbacks and use adaptability in your growth strategies. In the end, your hard work on the front end will help you sustain and enhance the value of your SaaS portfolio in the long run.