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Understanding SaaS Valuation

Posted by Paul Volen in Articles

The SaaS business model is a very unique one and is also one that has become very popular for people looking to step into recurring revenue model business. SaaS valuations can be very complicated, however, because of the kinds of metrics involved in establishing a value.

Important Info for SaaS Valuation

Benchmarks, quick ratios, cohort analysis, and trim lines are just a couple of the different metrics that might be brought into a SaaS evaluation. However, these little highlights are some of the positive aspects of the SaaS business model, while leaving out some of the trickier parts that could still be important for someone thinking about purchasing your SaaS business.

According to research, the median amount for a SaaS company to acquire $1 of new customer revenue is $1 and 18 cents. This means that it is over 9 times less expensive to get existing customers than to attempt to acquire new ones. This is why the recurring revenue model and metrics, such as churn, are so important in valuation of your SaaS business.

Many of the companies that are successful in selling their SaaS based revenue model will have put in significant amounts of time and effort on the technical side to ensure that an appropriate architecture is in place to build customer loyalty. In some of these case, however, the founders might have put less effort into the sales and marketing sides of the business. However, for a buyer, this could prove appealing since someone with a marketing background could come in and take over and begin to build them out from a marketing standpoint.

What Engineers Think When Building

Most software engineers who establish a SaaS company are happy to grow their businesses slowly and organically for the most part. Their point of genius is in solving and finding technical problems with customers, but the same engineers might have a missing skill set or desire to excel at marketing. This means that when the engineering aspects of a company have already been firmly established and proven with customers, then a marketer might be interested in purchasing such a company. Since the company will have already gone through the comprehensive process of finding a product and market fit, this significantly enhances the value proposition of a SaaS business.

Finding that product market fit is something that should never be overlooked in the building of your SaaS company. This is because in a physical products company, that fit can be identified quickly, but the process for SaaS could require tens of thousands of dollars and many months. This is one of the reasons that some SaaS companies pull in higher multiples when listed for sale with a business broker. Some of the most important valuation factors to be aware of with a SaaS company include:

  • Churn, which is the percentage of customers who leave in a given time period.
  • The revenue profile
  • Acquisition channels

You can discuss all of these issues and how they might affect the underlined SaaS business valuation by consulting with our experienced business brokers today.