Buying or selling a software company or SaaS business can be complex. Alongside the usual commercial, legal and practical considerations, buyers and sellers also need to think carefully about intellectual property, customer contracts and licensing, recurring revenue, cybersecurity, data protection, and the third-party technology and people the business depends on.
Drawing on our extensive experience advising clients in the tech sector on business transactions, this guide explains how the process works, the key risks to consider and the steps buyers and sellers can take to set themselves up for success.
What makes buying or selling a software or SaaS business different?
Buying or selling a software or SaaS business presents some unique challenges that require careful consideration:
- Intellectual property: the value of a software company is often heavily dependent on intellectual property rather than physical assets, such as property or stock. This makes understanding who owns the IP, whether it is properly licensed where required, and how well it is protected particularly important.
- Customer contracts: as more software companies move towards a SaaS model and customers expect greater flexibility, the way customer contracts are structured, the reliability of recurring revenue and customer churn can all have a significant impact on value.
- Third-party reliance: most software today relies on a range of third-party systems to operate, from cloud hosting to payment platforms. When buying or selling a software or SaaS business, these relationships and any over-reliance on key providers need to be carefully considered. It is vital to understand that the business being bought or sold has the correct rights and licenses to use any third-party software and code.
- Data protection and cybersecurity: software and SaaS businesses often handle large volumes of customer and user data, making data protection and cybersecurity particularly important. Robust security measures and data management processes can be fundamental to how the business operates and its value.
- Key person risk: small and medium-sized software and SaaS businesses can become heavily reliant on key team members, such as a founder or senior developers. Being able to demonstrate that the business can operate independently of these individuals, or that they will remain involved after the sale, can therefore be important.
Whilst buyers and sellers of software or SaaS businesses can expect many of the same considerations that come with any business transaction, assessing risk is often especially important. Is the IP the software is built on properly protected? Is customer data secure? How reliable is the recurring revenue? Could the loss of key people or third-party systems cause significant disruption?
How to buy or sell a software or SaaS business
Although every software or SaaS transaction is different, most follow a broadly similar process. For a more detailed breakdown of the stages involved, see our buying a business checklist or selling a business checklist.
1. Prepare for the transaction
Whether you’re a buyer or a seller, preparation is key. The first step is clearly defining what you would like to achieve and identifying potential challenges. This could include price, transaction structure and timing, as well as software-specific considerations.
Buyers should explore funding options and set out their acquisition criteria, including the digital capabilities, intellectual property or customer base they want to acquire, positioning them to move quickly when the right opportunity arises.
Sellers should undertake a business health check, identifying any issues that may affect value. For software and SaaS businesses, this should include conducting technology due diligence to assess your strengths, risks and dependencies.
2. Seek expert advice
Alongside corporate and commercial solicitors, buyers and sellers can benefit from the support of a range of professionals, including accountants, business brokers, tax advisers and corporate finance advisers.
In some cases, buyers may also wish to involve technical specialists to assess a business’s technology infrastructure, identify potential risks and help determine whether the valuation is justified.
3. Agree Heads of Terms
Heads of Terms set out the key commercial points agreed between the buyer and seller before the detailed legal work begins.
For software or SaaS businesses, they may cover the purchase price, transaction structure, intellectual property and technology included in the deal, key customer contracts and any ongoing involvement from the seller or key employees.
Heads of Terms are not usually legally binding, although certain provisions may be, including exclusivity or lock-out arrangements, confidentiality obligations and provisions dealing with costs.
4. Carry out due diligence
Due diligence allows the buyer to raise enquiries about a business, understand how it operates and identify issues that could affect the price or transaction.
Alongside the usual financial, legal and operational enquiries, technology due diligence is particularly important when dealing with software and SaaS businesses. This can cover:
- Technology strategy and roadmap
- Infrastructure, systems, integrations and third-party reliance
- Cybersecurity and data management
- Intellectual property and licensing
- Software architecture, scalability and technical capability
Buyers should make sure their enquiries are thorough, whilst sellers should provide clear, properly documented responses. This helps buyers identify issues that could affect the value of their investment, as well as helping protect sellers from future claims where matters have been properly disclosed.
5. Negotiate the Purchase Agreement
Due diligence often leads to further negotiations. These could cover everything from price to additional protections, such as warranties and indemnities, provided by the seller.
There may also be software-specific considerations to address, such as how intellectual property will transfer or whether restrictive covenants are needed to prevent the seller from launching a competing software business.
Once negotiations are complete, the agreed terms are finalised in the Purchase Agreement, assuming both parties wish to proceed.
Having an experienced solicitor on your side can make a real difference. At Scott Bailey, we draw on our extensive experience advising both buyers and sellers to help our clients achieve a fair price and negotiate terms that protect their interests.
6. Complete the transaction
Once the Purchase Agreement has been signed, the transaction can complete. Completion does not always need to happen immediately. Where necessary, it can be made conditional on specified requirements being satisfied first, giving both parties time to put the right arrangements in place for a smooth handover.
For software and SaaS businesses, careful completion planning can be especially important. This may include managing the transfer or continued operation of critical systems, ensuring key technical expertise is retained and obtaining any required customer or third-party consents.
Buyers should also consider how the change of ownership will be communicated to customers, particularly in SaaS businesses where short renewal periods or flexible cancellation terms can increase the risk of churn.
Key considerations when buying or selling a software or SaaS business
Intellectual property ownership
Intellectual property is often fundamental to the value of software and SaaS businesses. It is therefore in both parties’ interests to clearly understand what IP the business owns, what it licenses from third parties and what rights it has to use that IP.
For sellers, conducting an IP audit before going to market can help ensure the intellectual property underpinning the value of the business is properly protected.
Customer contracts and recurring revenue
Understanding customer contracts can be particularly important in the technology sector, especially for SaaS businesses. The SaaS model has given customers greater flexibility by enabling them to access platforms on a subscription basis, but it can also create additional risk for software companies.
Both buyers and sellers should pay particular attention to subscription terms, renewal mechanics and cancellation rights, alongside recurring revenue and customer churn, as these can be fundamental to the value of a SaaS business. Any over-reliance on a small number of customers should also be considered, whether the company operates a SaaS or traditional licensing model.
It is also important to check whether there are any provisions that could impact the transfer of customer contracts during the transaction.
Third-party technology and open-source software
Most software today is heavily dependent on third-party systems and technology, such as cloud services, payment platforms and APIs. Whilst understanding what intellectual property a business owns is always a key consideration in business transactions, for software companies, the third-party technology, systems and software it relies upon can be equally important.
Buyers should undertake appropriate due diligence to ensure the company’s tech stack does not present any significant risks and that it has the rights required to use any third-party systems or open-source software it relies upon. Whilst some buyers may have the expertise to do this themselves, others can benefit from seeking advice from a technical specialist.
For sellers, reviewing these third-party dependencies and addressing any issues before going to market can help make the business more attractive to buyers and increase its value.
Data protection and cybersecurity
Any software or SaaS business without robust cybersecurity measures and data protection protocols in place presents a significant risk to buyers. Before going to market, sellers should ensure their business complies with all relevant data protection regulations, such as UK GDPR, and address any cybersecurity vulnerabilities.
For buyers, gaining a clear understanding of what data a business processes, how and where it is processed and whether there have been any previous cybersecurity breaches or data protection regulatory issues is essential and should form a key part of technology due diligence. It is also important to look beyond the company itself and assess any third parties that process data on its behalf.
Key person risk
Small and medium-sized software and SaaS businesses can often become heavily dependent on a founder or key developers who know the system inside out. For buyers, this presents a significant risk, as losing that knowledge could disrupt the business and impact customers.
As a seller, it is worth taking steps before going to market to ensure the business can operate independently of you and any key developers or staff members. You should also review your employment contracts, as retaining important employees is likely to be a priority for your buyer.
Buyers should carefully consider what expertise needs to be retained to ensure a smooth transition after completion and put appropriate arrangements in place. This could include an agreement with the previous owner where they remain involved for a defined period post-completion to support the transition.
Strategic roadmap and scalability
When buying a business, growth is often a top priority. A software or SaaS business with a clear strategic roadmap and the infrastructure in place to support it is likely to be more attractive to buyers.
Before going to market, sellers should identify and address any outdated infrastructure or weaknesses in their software that could limit growth. Buyers should assess whether the roadmap is realistic and whether the existing infrastructure will require additional investment to deliver it.
How much does a solicitor cost to buy or sell a software business?
The cost of obtaining legal advice can vary depending on the complexity of the transaction, the law firm advising and its fee structure. At Scott Bailey, we offer fixed-fee pricing wherever possible, providing clients with clarity on costs from the outset.
At the time of writing, our legal fees for buying or selling a business are generally between 1% and 2% of the transaction value, depending on the complexity, work and risk involved. For smaller, more straightforward transactions, our fees start from £4,425 plus VAT and disbursements.
Fees are subject to change, and we will confirm the costs applicable to your transaction before you instruct us.
How Scott Bailey can help
At Scott Bailey, our specialist solicitors combine extensive experience advising on business sales and acquisitions with a proven track record supporting clients in the technology sector. We combine commercially minded advice with transparent fixed-fee pricing tailored to SMEs.
If you need advice on buying or selling a software or SaaS business, our specialist team can support you from preparation through to completion and beyond. To arrange a consultation, please get in touch:
