The Path to Exit — Episode 23
Strategies for Selling Your SaaS Company to a Competitor
Host: Mike Lyon, Vista Point Advisors
Guest: Jeff Koons, Managing Director & Founding Member, Vista Point Advisors
Date: December 18, 2024
Episode Overview
This episode dives deep into the intricacies of selling a SaaS business to a competitor. Host Mike Lyon and guest Jeff Koons from Vista Point Advisors explore the significant risks and rewards founders face when considering a competitor as a potential buyer. They break down how to weigh these decisions, what kinds of competitors make attractive buyers, methods for protecting sensitive information during the sale process, and tactical steps founders can take to safeguard their strategic interests.
Key Discussion Points & Insights
1. Understanding the Risks of Engaging Competitors
[01:06]
- Competitive Data Risks: Sharing proprietary or competitively sensitive information is a primary concern. This includes product roadmap details, customer lists, and future plans.
- "Providing competitively sensitive data or information that is proprietary to your own company... That obviously could be viewed as an advantage to them." — Jeff Koons, [01:06]
- Market Rumors: If customers (or potential customers) discover a sale process, it could affect current business performance.
- Intentions of the Buyer: Questions often arise whether the competitor is genuinely interested in acquisition or simply fishing for inside information.
- Innovation Risks: Revealing unreleased product features or innovations can hand a competitor a strategic edge.
2. Why Consider Selling to a Competitor?
[02:30]
- Premium Valuations: Competitors can often pay the highest price given the potential for synergy.
- Revenue Synergies: Cross-sell and upsell opportunities through combined product offerings.
- Time-to-Market/Build-vs-Buy: Acquiring saves time and resources, especially if building a competitive product would take years.
- Economies of Scale: Lowering costs by consolidating teams and eliminating redundancies.
- Pricing Power: Reduced price competition post-acquisition can lead to increased profitability.
- "A competitive bidder can pay the highest price...it comes down to synergies." — Jeff Koons, [02:30]
- Market Risk Underwriting: Competitors already understand the market and are more comfortable underwriting sector-specific risks (e.g., small TAM or regulatory concerns).
- Market Leadership: Roll-ups and category consolidation can cement market leadership, unlocking additional value beyond standard revenue multiples.
- "True category leaders...are built via M&A and so they'll go and acquire all the best of breed point solutions and ultimately roll them up." — Jeff Koons, [04:55]
3. Deciding Which Competitors to Include
[06:29]
- Profile of a Good Competitor-Buyer:
- Large, well-capitalized (public company or major PE-backed).
- Demonstrated track record of paying premium multiples and closing deals.
- Product suite is complementary, not directly overlapping.
- Actively losing market share to you—acquiring becomes defensive and strategic.
- "Do they have a track record of premium M&A? ...Are you taking market share from them?" — Jeff Koons, [06:29]
- Customer Overlap Analysis: Deeper diligence may reveal less overlap than assumed, meaning greater synergy potential from cross-selling.
4. Red Flags: When to Avoid Competitors
[10:26]
- Discounted or Struggling Players:
- Legacy firms trading at low revenue multiples are unlikely to offer a premium.
- Under-capitalized firms, with little M&A firepower or stretched resources.
- "Tire Kickers": Companies or funds with reputations for never closing, just seeking competitor data.
- "It'll get out if... they're in every process and they submit bids...to get more access to data room." — Jeff Koons, [11:15]
- Bad Behavior: Distinguishing between normal competitive tension and reputationally bad actors is key.
- Sales teams are often the leak risk; sophisticated buyers keep sales staff out of the M&A loop.
- "The salespeople are the most leaky at any organization." — Mike Lyon, [12:40]
5. Staging & Qualifying Prospective Buyers
[14:22]
- Engage Investors First: Especially with PE-backed strategics, go to the investor before the operating company. Provide high-level, anonymized information to gauge serious interest before revealing any identity or details.
- "Go to the investor first...They can give you a really quick read without the names." — Jeff Koons, [14:22]
- Watch for Deal Structure Red Flags: PE firms close to exiting their portfolio company may offer suboptimal structures (e.g., heavy rollover equity).
- "If a PE firm has made an investment...they're looking to exit in the next year or two...that will significantly drive down the amount of cash in your deal." — Mike Lyon, [15:37]
6. Protecting Sensitive Information in the Sale Process
[17:16]
- Two-Tier Info Packs: Create a version of your data room specifically for competitors—strip out customer names, product roadmap, quota attainment, org charts, and any "secret sauce".
- "The advice we give...is if you would be uncomfortable with the competitive CEO reading this...take it out." — Jeff Koons, [17:16]
- Late-Stage Competitor Inclusion: In highly sensitive cases, exclude competitors until final bids are in, then only invite them at the last minute (rarely leads to best valuation, but maximally protective).
- Inter-firm Dynamics: Be aware of relationships between PE firms, their different funds, and strategics—cross-fund politics can influence deal process unexpectedly.
7. Tactical and Legal Defenses
[22:37]
- Strong NDAs: Include strict non-solicit clauses and clear damages definitions. Redline these carefully for competitors.
- Firewalls: If sharing info with a PE firm, require a contractual firewall between investor and portfolio company.
- "Once some general partner's signature is on a document that states how damages will be calculated, they will actually keep that stuff private." — Jeff Koons, [23:18]
- Redaction: Practical removal/obfuscation of customer names, sensitive data (like bidding keywords), and compensation details from shared materials until deal is nearly closed.
- Customer Diligence: Use third-party firms for customer interviews—avoid tipping customers that a competitor is considering buying your company.
8. Creative Situational Tactics
[25:17]
- Extreme Examples: In hyper-competitive sectors, some deals proceed with competitors never even learning the seller’s identity until close—full redactions can command substantial premiums in rare cases.
- "We got bids and got to the closing. Now, the day before the deal closed...they did actually find out...But I think we probably got a 15% premium because they weren't exactly sure who it was." — Mike Lyon, [25:41]
Notable Quotes & Memorable Moments
-
On Synergies and Valuation:
"A competitive bidder can pay the highest price...revenue synergy...time to market, product expansion...pricing leverage...those things really can move the needle."
— Jeff Koons, [02:30] -
On Customer Overlap:
"Having direct customer overlap, that's not super valuable...There's a lot more cross sell and upsell future revenue available to them."
— Jeff Koons, [09:31] -
On NDA Protections:
"You would want to work with your lawyer on this...ensuring you have the non-solicit and a clear line on damages if somebody was to violate the NDA is really important."
— Jeff Koons, [22:37] -
On PE Firm Timing Risk:
"If a PE firm has made an investment...they're looking to exit in the next year or two and it will significantly drive down the amount of cash they want to put to work in your deal."
— Mike Lyon, [15:37] -
On Extreme Redaction:
"We got bids and got to the closing...I think we probably got like a 15% premium because they weren't exactly sure who it was, but they wanted to do a deal. So this was just a way of protecting our client."
— Mike Lyon, [25:41]
Timestamps for Key Segments
- Risks of Selling to a Competitor: [01:06]–[02:30]
- Why Competitors Can Pay More: [02:30]–[06:11]
- Good vs. Bad Buyer Profiles: [06:11]–[12:03]
- Qualifying and Staging Buyers: [14:22]–[16:44]
- Protective Strategies/Data Handling: [17:16]–[22:37]
- Legal/Tactical Defenses: [22:37]–[25:02]
- Creative Tactics/Extreme Cases: [25:17]–[27:08]
Summary
The conversation between Mike and Jeff provides a masterclass on the high-stakes decisions involved in selling your SaaS company to a competitor. Listeners come away with a clear understanding of the nuanced risks at play, how to screen potential buyers for the optimal balance of value and safety, and the practical, tactical steps founders and their advisors should use to protect their interests at every turn. The tone is straightforward, honest, and focused on maximizing founder outcomes in a complex, competitive M&A landscape.