How to Put a Value on Your SaaS Business
For many business owners, the thought of selling a business they’ve worked so hard to build may never even come up.
However, for many SaaS, PaaS, and IaaS entrepreneurs, the business was built with the intentions of selling it one day and letting an investor pick up where the entrepreneur left off.
That means they’re going to need to figure out how much their business is actually worth to a buyer.
Often, sellers look toward the figure other businesses have sold for, which can create a variety of problems. Businesses tend to sell on a wide spectrum of values, and one business may be significantly different than the next.
Some businesses will have a full team of people with 10 years of consistent growth, while others may be 1 or 2-person operations with a couple of years of rapid growth. Each of these businesses will have different values to different investors.
All this means is that to understand how much your own business may be worth, you’re going to need to look at the factors that buyers are going to be looking at, and then make sure your own business can stand up against other businesses should you decide to sell it. Even if you don’t wish to sell, it’s always good to see where your business fits in the current marketplace.
Your Value Has a Lot to Do with Your Growth
As investors look at your business, one of the first factors they’re going to dig into is the business’ growth and how consistent that has been since you started building it.
They want to see how you are generating new leads for the business, how you’re converting those leads into new customers, which products and services you’re offering, and how long you are able to keep a customer.
The best businesses are able to show investors how they are performing in these key areas.
If your revenue rises and falls, investors may be less willing to offer a higher asking price than they would if the business has grown consistently from year to year. If there is still potential left in the business, their offers may go up, as well.
If your sales are constantly going up and down, or if you’re heavily reliant on a single large contract for the bulk of the business’ revenue, buyers could see the business as risky and not want to submit an offer.
Your Marketing Will Affect Your Valuation
You will also need to show the marketing strategies you have used to grow the business.
Buyers want to see the traffic sources that you’re relying on, and how well you’re able to generate new leads through content marketing and search engine optimization. These two strategies can generate incredibly targeted high-quality leads.
Unfortunately, many SaaS, PaaS, and IaaS business owners do not place enough emphasis on search engine optimization or content marketing, and end up leaving a lot of money on the table during the sales negotiations because of it.
Clients may have been flocking to you, lapping up your innovative offering but that’s unlikely to last forever. There is always someone else with a similar and maybe better idea waiting to open up shop. Investing in marketing is important for the long term positioning of your brand and growth of your business.
Investors Do Not Want a New Job
The amount of time your buyer needs to put into the business once they acquire it also plays a role in how much they’re willing to pay for it.
To give you an example, if you are currently putting in 40 to 60 hours a week just to maintain your business, and if you fail to put in those hours the business will begin to slide, it’s going to be seen as risky by investors.
On the other hand, if you have a completely hands-off business, investors may also devalue the business because they believe it may be being neglected in some way.
The real value lies in the fact that investors do not want to buy a job for themselves but they do understand that maintaining a high-end business does require some sort of effort on their part.
ARPUs Aren’t Always Reliable
Most business owners will want to rely on their ARPUs, or average revenues per user, to figure out how much their business is worth.
Investors do know that your APRUs will eventually be used in the valuation, but comparing the APRUs from one business to the ARPUs of another business can be incredibly misleading.
To help you understand this concept, let’s take a look at two different SaaS businesses. One sells directly to consumers and has lower APRUs as a result, while another has higher APRUs but sells directly to large corporations. Each business will be worth a significantly different amount.
How Quickly You’ve Grown Is Important
When it comes to SaaS / PaaS / IaaS businesses, how long you’ve been in business isn’t nearly as important as how well you have grown, and whether the growth you’ve experienced is able to be sustained.
You’re going to need to be able to show investors your churn rates, lead conversion rates, and any growth trends that you’ve identified as still remaining in the market.
You’ll also need to look at how much your business depends on annualized subscriptions and monthly subscriptions. Businesses that are more reliant on annual subscriptions will take longer for an investor to see an ROI.
Your Business Should Be Transferrable
Some businesses, while incredibly profitable, are almost impossible to sell because they cannot be easily transferred to a new owner.
To give you another example, if the code in your service is undocumented and full of bugs, you have financials that are hard to understand, or there are agreements in place that the business relies on that cannot be transferred to a new owner, obtaining a high valuation may be impossible to do.
Digging even deeper, you may have used a payment processing company that investors cannot use -- such as PayPal, that cannot be used in certain countries around the world.
To obtain a high valuation, you need to make sure that an investor can easily step into your role as the new owner without worrying about the business dropping in revenue or having to deal with putting out fires you should have put out before you listed the business for sale.
How Much Is Your SaaS Business Worth?
This isn’t a simple question with a simple answer. As a broad range, SaaS businesses sell from 2.5x annual profit SDE on the lower end to 4.0x their annual profit SDE on the higher side.
The range is huge but for good reason, there are so many variables. Looking at those outlined above will give you an idea of value and also give you an idea where you might want to make some improvements or investments in your SaaS business.