Owning a SaaS business can be highly profitable. However, if you decide to sell your business, you have a complex journey ahead of you to work out the overall value of your business. There is heavy debate on the best practices for the valuation of SaaS businesses. Therefore, we need to look at the processes carried out by the leading SaaS sellers. Throughout this article, we will tell you what the top approach is to sell your SaaS business, including the best metrics to track.
How To Value and SaaS Business
There are two methods of valuing a private business that all come down to size. For companies with a worth of over $2 million, earnings before interest, taxes, depreciation, and amortization (EBITDA) are used. If a business is smaller, seller discretionary earnings (SDE) is used. In some cases, a combination of both methods is used.
The above are the most commonly used methods of valuation. However, for startup SaaS businesses that require investment, EBITDA and SDE aren’t enough on their own to prove value. Therefore, other metrics are thrown into the equation, such as churn and product lifecycle. Throughout the rest of this article, we will explain the most essential metrics.
Your potential buyer will need to have a detailed overview of your finances alongside how integral a founder’s input is. When you step away from the company, would it struggle to succeed? To test this out, you should take a step back before the sale and measure the metrics. That way, you can demonstrate clear evidence to potential buyers.
Churn refers to the number of customers that are lost during a certain time period. Typically, this is displayed as a percentage and helps predict the probability of customer loss. To get the best sale possible, you should try and achieve a negative churn, which means that your existing customers bring in more sales than potential losses. If you can do this, your continuing customers are sustaining your revenue without the need to spend on new customer acquisition. This is a great prospect for potential SaaS business buyers because it means that they don’t need to put in much groundwork to turn a profit.
When a buyer is analyzing a SaaS company’s worth, they will take a close examination of the cost of acquisition (CAC) – the total cost of onboarding new customers. This metric is essential because it tells a buyer whether a company will be profitable.
When you are preparing for your sale, you should look at how much your CAC is. If you notice that you have running high costs, you should look into lowering this. Remember, you are trying to sell your business, and the new buyer can change the formula once they’ve signed on the dotted line.
When it comes to measuring revenue growth, you should focus on building a positive monthly recurring revenue (MRR). The higher your MMR is, the more valuable a multiple it has and the more likely you are to secure a higher sale. On top of your MMR, you should take a look at your overall sustainability. If you’ve had to bleed cash to get to the position you are in, your MMR might not be the best metric to use.
The SaaS business market holds high demand right now, which makes selling a business difficult. Luckily, through understanding the most desirable metrics and working with the right people, you will be able to make sure that your business looks glamorous to potential buyers.