valuationI’m currently building a SaaS accounting-software. We are growing at a steady rate of about 20 customers per month with very high customer retention. And close-to-zero customer acquisition cost.
I don’t believe our current business model can grow big enough to ever become a public company, and right now we are not looking for external capital, mostly because we don’t need it.
At some point however, I might consider selling the entire company. What are the driving factors for the valuation of our company at that point and who might be interseted in buying it? What models might a business-developer/analysist use to determine the value? What is concidered value in a company? Turnover? Technical platform? Headcount? Client-list? Etc.
Value in SaaS and subscription software is based on recurring revenue. The primary growth indicators you should be tracking are ARR (Annual Recurring Revenue) and the monthly counterpart, MRR.
Determining the actual value of the company will depend on its costs as well. You can generally estimate the value of a company to a buyer or investor by looking at the free cash flow. Calculating something like 5 years’ worth of free cash would be a decent starting point for a valuation.
High customer retention, low cost of acquisition, etc are great and important factors for general interest from a buyer, but at the end of the day they don’t influence valuation and selling price that much.
The old school would be gross profit and market penetration. I am not too familiar with your market, but a general rule of thumb for a sell would be to set yourself up where your company if acquired would fill in the gaps of a potential competitors product. Doing that will give your product value in the eyes of the buyer. But again there are a lot of ways to approach this. Best of luck!
IPO-ability of the company is not mandatory, but the scalability and growth rate are crucial.
You are familiar with SaaS metrics, aren’t you? LTV, CAC, Growth Rate, Gross Profit, Market are surely considered in a SaaS valuation.
www.forentrepreneurs.com/saas-metrics-2/
In the end an SaaS company has the same most important valuation factor as any other company: expected future profits.
If I expect the company to make 20$ profit every year for the next ten years and beyond, I would easily be willing to pay 100$ or more for your company - if your company only makes 1$ profit every year for the next ten years, I would never pay that much. Obviously profit expectations are not always flat for the next years …
In summary, the most important question to an investor is: “How long will it take until I get my invested money back”?
How to evaluate how much the company will earn in coming years will depend very much on your company, even among SaaS there are big differences.
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