4 mistakes you should avoid when acquiring a SaaS business | SaaS District

So I've been involved in over 10 different SaaS acquisitions in the last couple of years. And one thing I wish I knew was these key critical mistakes that would have saved me literally hundreds of thousands, if not even millions of dollars. All right, so today I'm going to be sharing 4 critical mistakes you should avoid when acquiring a SaaS business that'll save you lots of money down the road. So many of you may have heard of Warren Buffett. His rule of investing is rule number 1, never lose money. Okay. And his second rule is don't forget rule number 1. All right. And that applies here. So the first critical mistake when acquiring a SaaS company is don't overpay on the business. When you look at the valuation of the company, you don't want to overpay of what the value is because you have to account for the risks involved and the growth trajectory of what is actually happening with the company. So don't get too attached to the business itself. Okay? When you're looking at the SaaS company, you might say this is a great opportunity, but when you look at it really, you have to look at— you have to account for all the risks involved and make sure you're paying the real intrinsic value of the company. Otherwise, if you overpay, you're not going to get the real results that you were hoping for. So tying to number 1 is the second point, which is mistake number 2 of being too optimistic of the business and the growth trajectory of what you think you can do with the company. Most people think when they look at a company, they think, oh, this is what I can do. I can do this, this, and this, and I'm going to grow it. And these are all the big opportunities and this guy didn't do it. I think I'm better than the owner and I know what I'm talking about. But the real trick in investing, the real value is focusing on the risk. Okay, you have to look at what are the real problems of this company? How can I actually de-risk it? Because the growth of the company is all upside for you, and that's your reward for working hard, having that expertise, and then growing it. But that shouldn't be accounted for, and you shouldn't be paying that premium because you know you can grow it. You pay for what the company is worth today and what it has the value of what it's doing at the moment. Anything above that, that's your upside. That's the risk you're taking for investing in the company, and you should be rewarded for it. All right? So that's number 2. Don't focus on being an optimist only. Don't focus on only the growth opportunities. Also look at focusing on the risk itself, because that's actually the most critical part once you make that transition and take over the company. Now, how do you make sure you make sure you look at the risks of the company? And that goes to my rule number 3, which is not doing enough due diligence. Okay? That's a critical mistake. If your due diligence isn't spot on, okay, there's a couple of things you have to look at. Operations. How is the company operating? How is the product itself? How great is the product? You know, how valuable is the product? How valuable is the moat of the company? Have you, have you interviewed all the team members? Are they all committed to staying on board? Do you have the right team in place? To manage the company? Have you looked at the financials? Have you looked at the legal risks? These are all risks you have to verify at every single stage before you make that decision to acquire the business. And to make sure that you verify what the seller is actually saying and stating about the real estate of the company. Okay, make sure you verify that. Don't cheap out here. Okay, this is one part I— it doesn't matter, you know, the cost here. Hire an expert here. There's a couple of people I recommend that you guys check out. But I would highly recommend you don't cheap out here, okay? Because if you miss something critical at that stage, it's going to cost you. You know, when you buy a company, this isn't a, you know, a 5-month, 6-month, 1-year commitment. You have to look at it at least, you know, 3 years or 5 years down the line. So you're now stuck with that problem that you missed. You know, you could have taken an extra month, an extra 2 months to verify that, that you now are stuck with for the next 5 years. All right, so make sure your due diligence is spot on when acquiring a business. Now going to my 4th point, okay, adding to not doing enough diligence is not being able to pull out of the deal. When you're doing due diligence, you feel like you're so committed to this business. You get attached, you get emotionally attached to the business. Take out the emotional attachment. You spend all this time, maybe you spend 2 or 3 months negotiating, you've structured the deal, you've done your due diligence. Now you've spent— you've hired an expert at due diligence. You've spent a couple thousand dollars with them. Now you feel compelled because you have a, you have some kind of commitment now to them. You have a micro-commitment that you have to close that deal, right? And you have to move forward. But a mistake people make at this point is they continue with the deal when they should have pulled out. Okay? You should be finding those red flags. And when you do, it doesn't necessarily have to pull out of the deal, but account for that risk and maybe adjust the offer, adjust the structure, adjust an earnout component to it. so that you're not overpaying and losing money, which we talked about. Now I have a rule that I've learned and I think it's super important for how you rank an investment. When you're making an acquisition, these are the 3 things you have to look at. Okay? Number 1, if you have the option of how to acquire a business, acquire a fantastic company. You want to buy an A+ company. Okay? Rule number 2 to that, the second option is do nothing. Okay, that sounds counterintuitive that no, you need to go out there. If you're doing nothing, it feels like you're not productive, like you're not doing anything. If it takes you a year and you've done nothing, people look at you like a failure because you haven't made an investment, you haven't made that acquisition. But if you haven't found that fantastic deal, do nothing. And the third thing you can do, okay, and the worst thing you can do is buying a crappy business, a poor quality business. So don't buy a bad business, do nothing first, and Don't be afraid to pull out of the deal if it's not working out and you don't see, you know, a really good business on the table. Opportunities are endless. They'll come at you, you know, every single day. There's new businesses that are being sold. There's literally millions of SaaS companies out there. Be patient and wait for the right one to come your way. Follow these steps and I guarantee you'll have much better success in running a successful company and save you guys thousands, if not millions of dollars in your acquisition. So rule number 1, just to reiterate, don't overpay for the business. Pay market value, pay what's fair, and make sure you account for the risk. Number 2, don't be too optimistic on the growth. Okay? You have that opportunity. You come in, you see the opportunity, but don't pay for that premium. Look at the risks, focus on the risk itself, and make sure you account for it so you can de-risk it. Number 3, not doing enough due diligence. Don't cheap out here. Put as much time and effort as you can to check every part of the business. And make sure you don't skimp out on your due diligence. And rule number 4, don't, don't be afraid to pull out of the deal if it's not a good business. All right guys, hope that was helpful for you guys. Let me know if you've guys made any of these mistakes in your own acquisition. Maybe you've guys done a small acquisition of a SaaS business and what mistakes have you made? Is there any other mistakes that I've missed? Let me know in the comments below. Hope that was helpful guys, and we'll see you guys on the next video.