How do you sell a SaaS business?

You sell a SaaS business by showing a buyer clean recurring-revenue numbers, agreeing a price built on a multiple of that recurring revenue or of earnings, passing a diligence review of your contracts, code and data, and then handing over the repositories, cloud accounts, domains, payment processor and customers during a transition period. For a small or mid-sized subscription software company, the sale takes months, and most of the work that decides the price is done before the first buyer sees anything.

A subscription company is sold on what its customers will pay next year, not on what it owns. That is why a buyer spends more time on retention than on the product demo. The sections below define each metric and compute it for one illustrative company, then follow the sale from valuation to the last account transferred.

Rules on contracts, intellectual property, tax and data protection differ from one country to the next. Where a rule is cited here, its jurisdiction is named; everything else is general information, not legal, tax or investment advice.

Which numbers does a buyer read first in a SaaS business?

A buyer of a SaaS business reads recurring revenue, retention, churn, acquisition cost and payback, gross margin, growth and customer concentration, in roughly that order. Each is a ratio of figures the billing system and the accounts already hold, so each can be rebuilt by the buyer from the raw data.

Take one illustrative company for the whole article. Twelve months ago it had 400 customers paying $80,000 a month in subscriptions. Over the year, customers from that starting group who cancelled took $9,600 of monthly revenue with them, others downgraded by $2,400, and others upgraded by $6,400. The company also signed 128 new customers who pay $25,600 a month between them, $200 each. It lost 52 of the original 400 accounts. Revenue recognised over the twelve months was $1,080,000.

Monthly recurring revenue (MRR) is the subscription revenue the company would bill in one month if nothing changed, with annual plans divided by twelve and one-off fees left out. Annual recurring revenue (ARR) is MRR times twelve. The table computes the rest.

Gross revenue retention (GRR) asks how much of last year's revenue is still there before any upgrade; it can never exceed 100%. Net revenue retention (NRR) adds the upgrades of those same customers and can exceed 100%. Neither counts new customers: both follow one fixed group across the period. A 13% annual customer churn is about 1.15% a month, a figure small businesses often quote instead.

These metrics are not defined by any accounting standard, so two companies can report "net retention" computed two ways. State your definition next to each number, and keep the export that lets the buyer rebuild it.

How do acquisition cost, payback and concentration change the picture?

Customer acquisition cost, payback period and customer concentration tell a buyer what growth costs and how fragile the revenue is. A company with good retention and expensive growth is a different purchase from one that grows cheaply and loses what it wins.

Customer acquisition cost (CAC) is sales and marketing spend divided by new customers won in the same period. The example company spent $230,400 on sales and marketing in the year and won 128 customers: $1,800 each. Payback is the number of months of gross profit from one customer needed to cover that cost. A new customer pays $200 a month at an 80% gross margin, so $160 of gross profit a month, and $1,800 ÷ $160 gives 11.25 months.

Gross margin itself deserves a careful build. For software, cost of revenue normally holds hosting and infrastructure, customer support, third-party software embedded in the product and payment processing fees. In the example these total $216,000 against $1,080,000 of revenue. A seller who leaves hosting or support out of cost of revenue shows a higher margin that the buyer corrects in diligence.

Concentration is the share of recurring revenue that depends on a few accounts. The example company's largest customer pays $7,000 a month, 7% of MRR, and its ten largest pay $24,000, 24%. Buyers ask the same question about acquisition channels, integration partners and suppliers.

Retention matters more than any of these because it compounds. The chart follows the same $80,000 of starting monthly revenue for three years with no new customers at all, at the example company's 93% net retention and at 105%.

After three years the two groups are $28,261 of monthly revenue apart, on the same starting base. That gap is why a buyer pays a higher multiple for the same ARR when retention is better.

How is a SaaS business valued?

A SaaS business is valued as a multiple of a base figure: annual recurring revenue when the company is growing and reinvesting, earnings when it is small or run for profit. The base is a fact drawn from the accounts; the multiple is a negotiation, moved by growth, retention, margin, concentration and how much the business depends on its founder.

Three earnings bases are in use. EBITDA is earnings before interest, tax, depreciation and amortisation. Adjusted EBITDA corrects it for items a new owner would not face or would face differently. Seller's discretionary earnings (SDE), used for small owner-run businesses, adds the owner's entire pay back, on the reasoning that the buyer may run the company personally.

The example company has $864,000 of gross profit and $648,000 of operating costs: $230,400 of sales and marketing, $280,000 of product and engineering and $137,600 of general costs. EBITDA is $216,000, a 20% margin. The founder draws a $60,000 salary; the accounts also hold $24,000 of one-off legal costs and $10,000 of personal expenses.

• SDE adds back the founder's salary and both items: $216,000 + $60,000 + $24,000 + $10,000 = $310,000.
• Adjusted EBITDA adds back the same three amounts, then deducts the $140,000 it would cost to hire a manager to do the founder's job: $310,000 − $140,000 = $170,000.

The $140,000 is an assumption a buyer and seller argue about, and it moves the earnings base by more than any other single line. Now price the same company three ways. The multiples below are illustrative, chosen to show the arithmetic; they are not market data, and any market multiple you are quoted should come with the name of its source, its date and the size of company it was measured on.

The table shows why the choice of base is not neutral. A buyer who thinks in earnings sees 21.2 times adjusted EBITDA and concludes the middle price is high; a buyer who thinks in recurring revenue sees 3 times ARR for a company growing 25% a year with an 80% gross margin. The seller's job is to know which kind of buyer is across the table and to prepare both views.

What should you prepare before you look for a buyer?

Before looking for a buyer, prepare six things: metrics that reconcile to the billing data and the bank, customer and supplier contracts checked for assignment and change-of-control clauses, proof that the company owns its code, an inventory of open-source licences, a record of how personal data is handled, and a business that runs without the founder. Each one is a standard diligence request, and each takes longer to fix during a sale than before it.

Clean metrics. Reconcile MRR to invoices and invoices to cash received, month by month. Separate recurring revenue from setup fees, services and usage overages. If you sell annual plans paid up front, show deferred revenue: cash collected for service not yet delivered is a liability the buyer inherits, and it usually enters the price negotiation.

Contracts. Read your terms of service and every negotiated customer contract for two clauses. An assignment clause says whether the contract can be transferred to another company, which matters in an asset sale. A change-of-control clause lets the other side terminate or renegotiate if the company's ownership changes, which matters in a share sale. Do the same for suppliers: cloud provider, data sources, embedded third-party software, app marketplace agreements.

Code ownership. The company must be able to show that it owns what it sells. Employees' work usually belongs to the employer under employment law and contract, but contractors are different. In the United States, the Copyright Office's circular on works made for hire explains that a commissioned work qualifies only if it falls within nine listed categories and the parties signed a written agreement saying so; computer programs are not among those categories. In practice this means code written by a freelancer belongs to the freelancer unless a written assignment transfers it. Collect a signed assignment from every person who ever contributed code, design or content, including co-founders who left.

Open-source licences. Produce an inventory of every open-source component and its licence. Permissive licences ask for little beyond attribution. Copyleft licences attach conditions to distribution, and one family reaches hosted software directly: section 13 of the GNU Affero General Public License version 3 requires anyone who modifies the program and lets users interact with it over a network to offer those users the corresponding source of the modified version. A buyer's technical team will scan the repositories; the inventory should exist before they do.

Data protection. Document what personal data the product holds, on what basis, where it is stored and which subprocessors touch it. Under the UK GDPR, the Information Commissioner's Office data sharing code tells organisations to treat data sharing as part of due diligence in a merger or acquisition, to establish what data is being transferred and the purposes for which it was obtained, to establish the lawful basis for sharing it, and to consider when and how to tell individuals what is happening to their data. Other jurisdictions have their own rules.

Founder dependence. List what only the founder can do: deployments, the largest customer relationship, the one integration nobody else understands. Then write it down, delegate it or automate it. A business that stops when one person leaves is priced accordingly, or sold with a long earn-out attached.

Which route leads to which kind of buyer?

Three routes lead to a buyer for a SaaS business: an online marketplace for small businesses, a broker or M&A advisor, and a direct approach to strategic or financial buyers. The right one depends mainly on the size of the company and on how much of the process the founder can run alone.

Buyers come in two broad types whichever route is used. A strategic buyer is an operating company, often a larger software vendor, that wants the product, the customers or the team and may value the business on what it becomes inside their own. A financial buyer, such as a private equity firm, a search fund or an individual acquirer, values the business on its own cash flows and its growth, often with borrowed money, and tends to ask more of the numbers.

An advisor is normally paid a success fee on closing, sometimes with a retainer, under an engagement letter that should be read as carefully as the sale contract. Advisors and brokers earn that fee by creating competition between buyers and by keeping the process moving while the founder runs the company.

What does the sale process look like, and what does diligence ask of a software company?

The sale process runs from a short anonymous summary to a signed contract through five stages: outreach under confidentiality, management meetings, a letter of intent, due diligence and the definitive agreement. Diligence on a software company adds technical, intellectual property, security and data protection reviews to the financial and legal work every sale involves.

Buyers first see a one-page summary without the company's name. Those who sign a confidentiality agreement receive a fuller memorandum: product, market, the metrics above, the team and the reason for selling. After calls with the founder, interested buyers submit indications of interest, and one is chosen to sign a letter of intent. The letter sets price, structure and an exclusivity period during which the seller may not negotiate with anyone else; most of it is not binding, but exclusivity and confidentiality usually are.

Diligence then tests everything the memorandum claimed. For a subscription software company the requests typically cover:

• Revenue: a customer-by-customer MRR history, cohort retention, the reconciliation of billing data to the accounts and the bank, deferred revenue, refunds and discounts.
• Customers: contracts for the largest accounts, renewal dates, concentration, support ticket volumes, and sometimes calls with a few customers late in the process.
• Technology: architecture, code quality, test coverage, deployment process, technical debt, infrastructure cost as usage grows, and dependence on any single supplier.
• Intellectual property: assignments from every contributor, the open-source inventory and licence scan, trademarks and domain registrations in the company's name.
• Security and data: access controls, incident history, penetration test or audit reports if any exist, backups, data processing agreements and the subprocessor list.
• People: employment and contractor agreements, who holds which credentials, and which employees the buyer needs to keep.

Source code is usually shown late, in stages, and often to a third-party reviewer, because a buyer that walks away should not leave with the product. Nearly every request above can be answered from a data room prepared in advance.

How is the price usually structured?

The price of a SaaS business is commonly split into cash at closing, an amount held back for a period to cover claims, and sometimes an earn-out or a seller note. Because the asset being bought is future subscription revenue, earn-outs in SaaS sales are often tied to retention or to recurring revenue after closing.

Stay with the example at the illustrative price of $3,600,000 and assume this split: 80% in cash at closing, 10% held back for twelve months against warranty claims, and 10% as an earn-out on retention. That is $2,880,000 at closing, $360,000 held back and $360,000 at risk.

The earn-out is defined on the customers the buyer acquires, who pay $100,000 a month at closing. If those same customers still pay at least $90,000 a month twelve months later, the earn-out is paid in full; below $80,000 nothing is paid; between the two it is paid in proportion. Suppose the acquired customers pay $87,000 a month at month twelve. That is $7,000 above the $80,000 floor on a $10,000 range, so 70% of the earn-out is due: $252,000. If the holdback is released in full, the seller receives $2,880,000 + $360,000 + $252,000 = $3,492,000, 97% of the headline price.

Three drafting points decide whether a retention earn-out works. The measure must be defined as precisely as the metrics table above: which customers, which revenue, measured on which date, from which system. The contract should say what happens if the buyer changes prices, migrates customers to its own product or stops selling the plan. And the seller needs a right to see the data the calculation uses.

Most buyers also ask the founder to stay for a transition period, as an employee or a consultant, with duties and duration written into the agreement, along with a non-compete or non-solicitation undertaking whose enforceability depends on the jurisdiction.

How is the purchase price paid at closing?

The purchase price is paid at closing against the signed agreement and the transfer of the shares or assets, usually by bank transfer, and often through an escrow agent or a lawyer's client account that releases funds once both sides have delivered. Any holdback stays with the escrow agent, or with the buyer if the contract says so, until its release date.

How buyer and seller exchange funds and control without either going first is the subject of a separate article here on settling a SaaS or online business acquisition, so only one point is added. The closing payment rarely goes to one person: co-founders, investors and an advisor owed a success fee each take a share. Where the parties agree to settle that payment onchain, a payment router such as Shaka can divide it: each party's share is set and can be signed before the buyer pays, the buyer pays once, and every party receives its share at the same moment in one final transaction. A router routes a single payment and never holds funds, so it does a different job from the escrow that secures a holdback, and it handles at most 20 recipients.

What has to be handed over after the sale?

After the sale of a SaaS business, the seller hands over five groups of things: the code and its history, the cloud and infrastructure accounts, the domains and email, the payment processor relationship, and the customers themselves. A handover checklist attached to the contract, with an owner and a date for each line, keeps the list from being rebuilt from memory in the week after closing.

The payment processor step is the one that most often delays a handover, because it depends on a third party's review and because a failed migration interrupts billing. Start that conversation with the processor as soon as the letter of intent is signed, without waiting for closing. In a share sale the company keeps its accounts and only the people controlling them change.

Customer communication is agreed between buyer and seller in advance: who sends it, when and what it says.

How long does it take to sell a SaaS business?

Selling a small or mid-sized SaaS business can be planned at roughly six to eleven months from the decision to sell to the end of the transition, with wide variation by size and by how prepared the company is. The table is an illustrative plan, not a measured average.

The last cell is the constraint that shapes all the others. A buyer measures the business again at closing, and often a third time for an earn-out, so a founder who stops selling and shipping during the process sees it in the price. Growth and retention in the months of the sale are part of what is being sold.