It’s Not All About the Benjamins: Why Building a SaaS Portfolio Takes More Than Just Cash

About a month ago I was asked to give a talk on acquisitions at Dan Martell’s SaaS Academy. (Sidenote: I highly recommend applying to Dan’s program if you’re stalled out on hitting that next level of SaaS growth, but you’re not interested in an exit). ‍

Presentations for this group are fast and furious — you get 10 minutes on stage to distill a complex topic for a really sharp group of entrepreneurs.

I started my time on stage by asking 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 you want to buy a traffic source and optimize it. Maybe you want to buy a competitor, or a complementary business. Maybe you want to diversify your 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 hard, and most people only wind up wanting to do it once.

I get a ton of questions from people about what it takes to buy a SaaS business, so today I'm sharing the same advice I gave to the SaaS Academy audience — whether you’re thinking about buying one business, or 100.

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Buying a business is a big deal, so how you show up for it counts.

Anyone who’s bought one business knows this, but if you’ve never done it before it’s easy to think you’re just trading cash for revenue. And it’s just not that simple.

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

So more important than any list of tactics (although we’ll cover a few of those in this post, too for the checklist-minded folks out there), here’s what I think it really takes to successfully acquire a business.

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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 can’t delegate it to someone else on your team (even someone you trust). It needs to have your full attention for at least the next quarter (and probably more like the next two or three).

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2. Be thorough

You need to do your due diligence in understanding all the details of the business you’re acquiring, but you also need to be thorough in your decision making process.

What are all the options you have in acquiring a business? Do you want something really connected to what you already do? Or do you want something completely different to diversify your revenue?

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3. Be disciplined

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

Those are all pretty normal things that come up when you’re evaluating a business. In acquiring 30+ businesses, I’ve personally looked at over 3,000.

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4. Be flexible

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

If you’ve ever gone through an exit yourself, you know that selling a business is really stressful for the founder, even in the best deals.

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

So you need to have flexibility in your terms, your timing, your communications — in everything — to take some of the stress out of the equation for them.

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.

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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 just keep coming in every month without doing those things, you’re kidding yourself or you’ve been watching some shady YouTube channels.

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6. Be choosy

This one’s pretty simple. If you get a bad vibe from a founder, for any reason, walk away. If they seem shady, chances are good you’ll uncover some things when you start running their business. Like I said earlier - your first opportunity probably isn’t your best opportunity. And with this tip I can revise that to your first hundred opportunities probably aren’t your best.

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7. Be cool

Business is hard and it brings out 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.

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Got the strategy? Let’s break down a few of the tactics.

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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 some (relatively inexpensive today) debt. Taking on debt adds risk, but it allows you to get some experience without giving up any equity or control to LPs. If you want to go bigger/faster, you could consider raising a fund. If you choose this route, you’ll need a clear differentiator to set you apart from the dozens of others pitching investors with "I’m going to acquire a portfolio of SaaS companies." It will also be easier to raise a fund if you have some successful deals under your belt.

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Making sure you have the capital

This should go without saying, but if you don’t have the capital to buy a business… don’t. It’s not okay 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 situation and they deserve transparency.

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Just ask Josh Pigford of Baremetrics who recently got ghosted by a buyer mere days from closing because they didn’t really have the funding to buy his company. The SaaS founder community is tight and word about situations like this gets around.

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Buying your first business

Like anything else, your first acquisition will be the hardest. No one knows who you are, you don’t 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 someone who can:

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

All of that is your brand. It's like your guarantee. And if there are a lot of people who all say the same thing about your guarantee and your guarantee is legit, that matters. Networking is great (and necessary), but results build relationships faster than networking.

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Finding potential acquisitions

In the beginning, since you have no reputation as a buyer, you're likely to have to source deals from brokers. Here’s how to spot a good one:

• They actually understand the businesses they broker
• They’re responsive
• They have a good reputation & references

You’ll also want to develop some criteria to identify potential acquisition targets. I can’t give you a definitive bullet list on this one, because it’s going to be really different depending on the type of business you want to acquire, and the reasons you want to acquire it, but make sure you have a list.

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Deciding how you’ll do valuation

Different niches (consumer apps, B2B SaaS, eComm) have different formulas. Different buyers have different valuations on companies because the buyers themselves have different capabilities. Know yours, and value the business accordingly — with an eye to market prices.

And remember that flexibility point above. If someone wants just a little over your valuation, that might not impact your bottom line very much, but it might mean a lot to the founder. But if they want $2 million for a $20k MRR business? It’s probably time to flex that “Be choosy” muscle instead.

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Developing your transition checklist

You need a transition timeline and responsibilities as part of the deal. At the bare minimum you’ll need:

• Account access info for everything related to the business (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 clear agreement of who does what pre-sale on the product, and who will be doing what post-sale. Both day-to-day and once the founders are gone. If you don't nail this, you’ll be behind the 8-ball.

(On the flip side, here’s our list of everything a founder should have ready if they’re thinking about selling their SaaS. You can use this to spot a founder who’s got their act together.)

From all of this you can probably tell that a good acquisition takes a lot more than just cash. You definitely need the cash, but that’s just the beginning. Having 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.

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Buying revenue is easier than building it from scratch. But (and it’s a big one), maintaining and growing that revenue over time is very challenging, and there are a lot of potential pitfalls during the sales process, especially if you’ve never bought a business before, so consider it carefully before you jump in.