Should I sell my “Rule of 40” SaaS company sooner or wait a few years?, a founder asked me last week.
Here are 10 questions I asked him before I shared my thoughts:
- What is your current revenue and growth rate?
- How confident are you about that growth?
- Are you sustainably profitable now?
- Do you have investors or a co-founder? Do they have a say?
- What’s happening in your market?
- Are potential buyers interested right now?
- How long have you been in this business?
- Are you tired?
- Will you enjoy being the CEO for your next growth phase?
- Do you need the money for some reason?
There is usually no clear yes or no answer, even after all these “it depends” questions.
Rule of 40 means a combined growth rate and profit percentage that adds up to 40. Grow at 25% + profits of 15%, for example. Steady and healthy.
This is a $5M ARR business in a slow-moving niche of a huge vertical. The founder has an efficient business that can keep growing, and he isn’t tired. And his VC investors are very patient, surprisingly.
After a 20-minute conversation, I couldn’t find any reason for him to hurry up and sell it soon.
There are some clear advantages of growing to $10M ARR, even if it takes 4 or 5 years.
- There are many more potential buyers for a $10M ARR business than a $5M business. He’ll get a higher multiple of (higher) revenue, probably 50%+ higher.
- He has VC investors with preferred shares, so he has to clear a certain amount in liquidation preferences before he makes anything on a sale.
- A $10M ARR business is more noticeable and credible in a vertical market. The momentum from being a recognized leader will help when he sells it.
- He has some fixing and improving to do in his business: efficient customer acquisition, category creation education, and customer upsells.
- He has an innovative product for a slow-moving industry. Revenue growth won’t stop, but it won’t move very fast either.
There are risks either way, from economic trends to political waves that affect his industry, financial market ups and downs, and everything else.
He realistically could go from a 5X multiple at $5M ARR to a 7-10X multiple at $10M ARR.
So go for $25M soon or bet on a $75M-$100M exit later, all things considered?
So I told him he should work hard to grow it to $10M+ ARR and see what happens.
This is based on my experience talking through this topic with dozens of SaaS founders and M&A brokers every month.
That risk-adjusted valuation bump is an amazing ROI for a founder-CEO in the SaaS business.
He agreed with me.
He has earned the right to have a precious choice.
