What are SaaS exit strategies?

A Software as a Service (SaaS) exit strategy is a plan outlining how the company’s investors and founders intend to eventually make a return on their investment and exit the firm. It involves converting the value they have created into observable monetary gains.

There are different types of exit strategies SaaS companies can choose from, each one bringing their set of benefits and limitations.

For SaaS companies, there are three main exit strategies:

• Mergers and Acquisitions (M&A)
• Initial Public Offerings (IPO)
• Private Equity (PE) investments. 

This allows founders to leave the business by going public, selling their stake to a PE firm, or selling off the entire organization.

Each of these possibilities is a different option to liquidating, with its own pros and cons. 

• M&A is potentially fast and lucrative.
• POs can lead to public markets, which affect the valuation.
• Private Equity investments lead to partnerships.  

The exit strategy is based on the business goals, development stage, financial performance, and market conditions.

The following factors should be examined by SaaS founders who want an exit strategy:

• Personal and financial goals: Consider your financial expectations. Are you considering a complete or partial exit? 
• Company’s stage of development: Is your company at a stage where an IPO is a real option? Are you prepared for the public scrutiny and reporting requirements of this option?
• Market conditions: Is the market in your industry currently amenable to IPOs or M&A activity?
• Company valuation: Consider which exit strategy is best for your company to leverage the value.

Consider these points to find an exit strategy suitable for your company.

Consider the following when devising your exit plan:

• Growth: Sustain your rates in revenue and customer acquisition.
• Team: To create your plan, have a capable leadership team.
• Financials: Keep your financial records transparent and in order.
• Customer base: Ensure your customers are prioritized so they remain loyal
• Product: To stay competitive, ensure your product evolves with time.

This will alter the company’s appeal to buyers and investors, affecting the valuation and exit process.

The average depends on many things, including market climate, profitability, growth rate, and annual recurring revenue. (ARR).

But in general, SaaS businesses typically are valued between 5x to 10x their ARR, with some companies exceeding these multiples.

Keep in mind these are average figures and not the exact valuation you can expect as it depends on your specifics.

The tax implications will depend on the specifics of the individual as well as local regulations.

• M&A: Shareholders typically must pay capital gains tax.
• IPO: Investors and employees exercising stock options might be responsible for capital gains taxes.
• PE Investment: Taxes depend on the deal structure with capital gains or income tax being applied.

See a tax professional to ensure an understanding of the liabilities relevant to each exit strategy.