10 Ways to Negotiate a Higher Purchase Price for Your SaaS Startup
To avoid walking away with less cash, you must develop counter-tactics to preserve or increase your purchase price. Here are 10 negotiation strategies that might help.
Negotiating the best price for your SaaS startup needn’t be as fraught as you think. As long as you’ve derived a fair valuation, verified your startup’s strengths and stated clearly what you want, your buyer will have little reason to refuse you. Especially if you find the right one.
Nevertheless, as I frequently stress in articles such as these, preparation is everything. Buyers tend to be expert negotiators, many of whom buy startups for a living. They’ll use their bargaining experience to reduce the price if it means earning a greater return on investment.
To avoid walking away with less cash, you must develop counter-tactics to preserve or increase your purchase price. Every buyer is different, and how you negotiate will depend to an extent on their personalities and history. Here are 10 negotiation strategies that might help.
1. Ask for it
Let’s start with the obvious: If you don’t ask, you don’t get. Although you should avoid overestimating your valuation, remember it’s only a guide. Even a professional’s opinion won’t always reflect the best price you can get. The buyer might pay more to acquire your superstars or unique IP, for example.
Also, entering negotiations with a single figure in mind puts you on the back foot. Decide on a high, middle and walk away price to give yourself room to maneuver. Giving the buyer options shows goodwill (that you’re prepared to negotiate) and ensures no one feels backed into a corner, which quickly turns business transactions into emotional ones.
2. Attract multiple offers
Buyers hate bidding wars. They’ll press you for exclusivity as soon as an LOI is on the table, but remember that nothing is certain until you both sign the purchase agreement. Whether you agree to exclusivity or not depends on your relationship with the buyer: All things being equal, are you certain they’ll close at your asking price? If not, attract multiple offers.
Buyers compete for a number of reasons, including investment opportunities, but also to avoid important technology or people going to their competitors. You don’t want to play buyers off against one another, as that can cause friction. Instead, be clear there’s more than one offer on the table. The more offers you receive, the higher the price should go.
3. Negotiate in person or on video
The best salespeople negotiate in person. When that fails, they do it over a video call. Email, messaging and chat applications are always a last resort — and for good reason. Even the greatest writers can’t convey the nuances of tone and social cues needed to resolve conflict. You negotiate better when you can see and hear your negotiating partner.
Zoom, Google Meet, Microsoft Teams — you have a ton of tools to choose from, some of which are free, so there’s no excuse for hiding behind emails. You won’t cause any offense stating clearly what you want and fighting for it. Indeed, you’ll likely earn the buyer’s respect, because you’ve saved them time, which could then dispose them to accepting your asking price.
4. Emphasize recent developments
You might spend weeks negotiating an acquisition, and a lot can happen in that time. You should have continued scaling, for example, but you might also have added material value. For example, have you secured a new partnership, won a high-value client, launched a new feature or product or hired a superstar who’s sticking around post-acquisition?
Any of these developments might justify a higher price, especially if it affects revenue. If you’ve just secured a three-year contract with an enterprise client, for example, the buyer should acquiesce to an adjusted price. This is why it’s so important to keep growing your startup and sticking to the roadmap right up until the business changes hands.
5. De-risk the acquisition
Put yourself in the buyer’s shoes. While you prime for exit and (potentially) a large sum of cash, the buyer is busy minimizing risk and raising funds. Imagine their concerns: Have they spotted a genuine opportunity? Are their assessments fair and accurate? Are they a good fit for your team and culture? Eliminate these worries, and you could justify a higher price.
Share everything pertinent to the acquisition (metrics, contracts, technology and so on). Agree to exclusivity on the assumption you get the price you want once you pass due diligence. Finally, consider an earn-out to soothe post-acquisition jitters over growth and profit. You might even stay on for a few months to train the buyer and help them achieve their goals.
6. Clear outstanding debts
Product development and sales and marketing burn a lot of cash in a SaaS startup’s early days when you’re refining product-market fit and finding customers. At this point, you have two options: Borrow capital and acquire debt, or raise it and lose equity. If you went the former route, pay off as many of your debts as possible.
This makes particular sense if you maintain a large amount of “rainy day” cash. Although it might’ve made sense to have an emergency fund before, the buyer will acquire it as a dollar-for-dollar exchange, so it doesn’t affect your valuation. It’s better to pay off outstanding debt with available cash and command a better purchase price.
7. Offer seller financing
You benefit most from an all-cash acquisition. An all-cash, upfront deal serves as a clean break allowing you to focus on your life and ventures post-acquisition. However, if the buyer can’t raise enough cash (or would rather pay in installments), you could offer seller financing. The buyer makes a down payment (usually 25-75%) and the rest in installments over the year.
Note you play the part of financier in this transaction, bearing the risk of non-repayment and of some unforeseen event that disrupts the business. As such, you deserve a little extra in the pot to offset the risk you assume. How much extra is between you and the buyer.
8. Accept equity in the acquiring company
You might ask, “If cash is king, why accept equity?” Well, if the acquiring company is going strong, a full or partial equity swap could mean a higher purchase price and the chance to reap rewards in dividends and stock appreciation. This is common in M&A and less so on the smaller end of the startup acquisition market, but it’s worth bearing in mind, just in case.
You might be approached by a competitor, for example, in a strategic acquisition, who wants to gobble up your market share. Like them or not, if they stand to be a key player in the future, their equity could be worth an attractive multiple of yours. Before doing any equity swap, however, ensure you do due diligence on the acquiring company.
9. Focus on synergy
In the SaaS acquisition market, one-plus-one seldom equals two. The buyer isn’t simply acquiring your startup, they’re leveraging your startup. You have something the buyer wants, and this goes beyond financial metrics, intellectual property, customers and so on. What can the buyer do after acquiring your startup that they couldn’t do before? Where’s the synergy?
An acquisition is a meeting of minds where powerful and sometimes unexpected benefits come into play. You’ve already done the hard part: building a sellable startup. The baton now passes to the entrepreneur and their expertise. Shift focus from what they’ll acquire to what they’ll be able to achieve, and you might negotiate a higher purchase price.
10. Get a professional's opinion
Buyers might ask for a professional valuation. As I wrote earlier, the valuation is a guide, not an upper limit on your purchase price. Ask other professionals for their opinion, too. Invoke the help of an M&A advisor, venture capitalist or serial entrepreneur. The only condition is that you and the buyer both trust this third-party to conduct an objective assessment.
A negotiation shortcut: if you’re confident in the third party’s opinion and the buyer is as well, both of you could agree to abide by their assessment, regardless of outcome. This takes the emotion out of negotiations and avoids accusations of misrepresentation or unfairness. Buyers might resist having the negotiation power taken away from them, but it could save a lot of time.
Your purchase price is a hot point of negotiation during acquisition discussions. Be upfront about what you want, provide evidence for it, invite other bids and give yourself a negotiation room. If all else fails, get a third party’s opinion to settle the matter or walk away. Your ideal buyer is out there.
Entrepreneur Leadership Network Contributor