If you’re an experienced investor, then you know that flipping businesses can be a lucrative way to make money. You buy a business with growth potential, steer it in the right direction to help it reach that potential, and then sell it for a profit. While this seems simple enough, its success depends on your ability to find and purchase the right business. If you want to buy a SaaS business, a SaaS acquisition strategy is key.
When choosing a business to buy, you must first decide what type of business to acquire, and there are many options to choose from. However, one industry that is booming and will most likely keep growing in the foreseeable future is the software-as-a-service or SaaS industry, which is expected to hit a total market value of more than $430 billion by 2025, almost doubling its value from 2020.
This level of projected growth in only five years makes the SaaS industry an attractive target for investors looking to buy businesses. That’s why we wrote an entire How To guide about buying SaaS businesses for newbie investors a while back.
However, acquiring businesses with the sole purpose of selling them in the future is by no means the only reason to invest in SaaS businesses. You may be interested in acquiring a SaaS business to add to your portfolio to earn long-term passive income from the business’s subscription revenue. Or, you may want to purchase a SaaS business to integrate it into your own business.
Whatever your reasons for wanting to acquire a SaaS business, you need to have a clear roadmap with a well-defined acquisition strategy, which is what we’ll cover in this post.
What is a business acquisition strategy?
A business acquisition strategy is a plan that helps you zero in on businesses that are available for sale, and that fit your investment criteria. It involves a systematic, rational methodology for acquiring companies tailored to your specific goals and needs as an investor or business owner.
Why is having a SaaS acquisition strategy important?
When you’re running a business, especially in a highly competitive landscape, having a plan and a proper strategy can mean the difference between success and failure. Each aspect of business requires its particular type of plan and strategy. For example, when marketing teams want to home in on a particular market segment, they’ll create a customer acquisition funnel custom tailored for that audience. When choosing a SaaS business to acquire, you should do the same.
There are thousands of SaaS businesses, but not all of them will be a good fit for you. A clear strategy can save time and energy by only considering businesses that match your criteria. All too often, investors get caught up in the excitement of buying a business and end up paying too much for it. Others end up purchasing a business without first doing their due diligence, only to realize that the company was not a good fit for their intended goals.
What should my SaaS acquisition strategy include?
When creating your SaaS acquisition strategy, there are several vital factors you need to take into account, including:
- Your investment goals: What are you looking to achieve by purchasing a SaaS business? Are you looking for rapid revenue growth, diversification, capturing a larger market share, long-term stability, or something else?
- The size of the business: What size of business do you want to purchase? Are you looking for a small, medium, or large SaaS company?
- The type of business: What kind of SaaS business do you want to buy? There are many different types of SaaS businesses, so choosing one that matches your goals and needs is important.
- The business’ location: Where is the company located? Are you looking for a local company or one headquartered in another country?
- The price of the business and your budget: How much are you willing to pay for the company? Remember that you will likely need to negotiate with the seller, so it’s essential to have a realistic idea of what you’re willing to pay.
- Timing: When do you want to buy the business? Are you looking for a short-term or long-term investment?
By taking the time to consider all of these factors, you’ll be in a much better position to define your acquisition strategy and find and purchase the right business.
Different acquisition strategies for different scenarios
Any plan starts with clear goals, which rings true for a SaaS acquisition strategy. As I mentioned before, there are several reasons why you may be interested in purchasing a SaaS company, and it’s critical to have clarity in this respect before shortlisting your options.
Depending on what these goals are and on your answers to the questions in the other five items listed above, we can define several different types of acquisition strategies.
Let’s look at what those strategies are:
#1 Synergy Strategy
The synergy strategy is about finding a company you can integrate into your own business to achieve cost savings or revenue growth. The idea is that acquiring the new SaaS company will help reduce costs and/or increase revenue in your current business. At the same time, your existing business will also help reduce operational costs or increase revenue for the target SaaS company. That way, joining both companies will result in more profitability than the sum of the two independently made. In other words, synergy is about 1 (your business) + 1 (the acquired SaaS business), equaling more than 2.
How to make the synergy strategy work?
The synergy strategy usually works when acquiring similar businesses in your market. The reason is that to make it work, you need to understand how the particular industry works and all the costs involved in running that specific type of business. Business owners usually have that type of clarity in their own business, but not in other niches.
However, this knowledge is essential to correctly evaluate how the new SaaS business will impact your current business’s costs and how your existing business will affect the target acquisition.
How to identify a SaaS business for your synergy strategy?
The first step is to analyze your business and understand how you can improve operational costs or revenue streams by acquiring a SaaS company. Once you have clarity on that, you need to look for SaaS companies on sale that would help improve those specific areas in your business.
Once you have a good list of potential candidates, it’s time to analyze those businesses’ costs and revenue streams and keep only those that can benefit from your products and services.
For example, suppose you own a trading platform and identify a SaaS company that provides order management software for brokers but doesn’t have a trading platform of its own. In that case, that could be a good fit for your synergy strategy. The reason is that you can offer order management software to your clients through your trading platform, increasing revenue for both companies.
#2 The Vertical Integration Strategy
The vertical integration strategy is about acquiring a SaaS company to attain greater control over your supply chain, either upstream or downstream. Controlling your supply chain, or at least the most critical parts of it, can help you improve customer satisfaction by ensuring more consistent delivery and quality of your product or service.
There are two types of vertical integration strategies:
- Backward vertical integration, and
- Forward vertical integration.
The idea behind backward vertical integration is that it will give you more control over the quality and costs of the products and services supplied by the target company. On the other hand, the idea behind forward vertical integration is that it will give you more control over the distribution channels and customers of the target. In both cases, you can improve your profit margins by having greater control.
How to make a SaaS vertical integration strategy work?
The first step is to analyze your business and understand what parts of your supply chain would benefit from greater control. Once you have clarity on that, you need to look for SaaS companies on sale that would give you that control.
I spoke with Zach Grove, employee #4 at Drip, who was part of the vertical SaaS acquisition of Drip by a leading landing page platform, and here’s what he had to say: “Consider which integrations your customers recommend the most. Your integrations are a gold mine for finding smaller (and loved) SaaS apps that you could add to your portfolio.”
Depending on which type of vertical integration you want to pursue, you’ll be looking for different types of SaaS businesses, but you want to home in on those that excel in the product or service you need for your supply chain.
How to identify a SaaS business for your vertical integration strategy?
The obvious choice for this strategy is a SaaS company already part of your supply chain. However, those businesses may not be on sale, so you’ll need to find other SaaS companies that can potentially take over critical parts of your supply chain effectively.
For example, if you’re running a cloud-based crypto exchange business, you know that security is always a top concern, and you must help your customers keep their private keys safe. Many companies in this niche outsource this part of the process to popular crypto wallets. These businesses might want to consider acquiring that SaaS company to have greater control over one of the most sensitive aspects of their business.
Once you have a good list of potential candidates, it’s time to analyze those businesses’ products and services and keep only those that can help improve the quality and consistency of your product or service.
For example, if you run a Business Intelligence Company, you might consider acquiring a SaaS company that provides data visualization software. That way, you can inherit the data processing and segmentation capabilities that can give you a competitive edge over others.
#3 Diversification strategy
The SaaS diversification strategy involves acquiring a SaaS company to enter new markets or geographies. This type of acquisition can be a way to reduce your dependence on a single market or customer segment and mitigate the risk that comes with it. This is undoubtedly the broadest of all the SaaS acquisition strategies and may be a good candidate for those seeking to flip SaaS businesses. This strategy entails a diversification in branding development, but the financial safety it offers you might be worth the extra work for most people.
How to make the diversification acquisition strategy work?
This strategy requires more hard work on your behalf since you’ll probably need to learn a lot about how to operate in a new market. If you’re not careful, this strategy can quickly become a distraction from your main business and reduce your focus.
The first step is to identify the alternative market you want to enter. Then, you should research and learn all you can about that market. This means analyzing things like:
- The size of the market
- The market’s growth rate
- Key trends
- The competitive landscape, and more.
Once you understand the market, you can start looking for SaaS companies that operate in that market. Remember to consider the products and services offered by the target company, its customer base, growth potential, and profitability.
If you’re diversifying into a new geography, then you’ll also need to consider things like language barriers, cultural differences, and differences in business practices.
How to choose the right business for this strategy?
You should start by identifying SaaS businesses with a strong presence in the markets you’re interested in moving into. The idea here is to find companies that would give you a foothold in new markets without requiring you to start from scratch.
Once you have your list of target companies, it’s time to start the due diligence process. This will require a deep dive into each company’s financials, products, customer base, and competitive landscape. It’ll also mean looking into the business model and key performance indicators, among other things mentioned in our post about buying a SaaS business.
The bottom line
SaaS acquisition is a complex process that requires adequate planning and laying the groundwork for the right strategies. This post covered the three most important methods to choose when acquiring a SaaS company. The SaaS diversification acquisition strategy is a good option for those entering new markets or geographies. Vertical integration, on the other hand, can be a way to reduce your dependence on a single supplier or distributor. Finally, synergy is one of the best strategies for increased revenue or reduced costs.
