How to Value a Saas Companies to Sell
Many entrepreneurs live by building and selling their SaaS companies. Know how to define the value of your SaaS company!
The SaaS industry (Software as a Service) has its own characteristics and many benefits compared to any other market area, the business model is still little known by the public, but almost all people in the web-connected world use at least one (or several) SaaS products in your daily life. This market is one of the fastest growing years after year, with companies making revenue at scale and billions of dollars coming in non-stop revenue.
In 2000, smartphones didn't even exist, 20 years later, the rise of these mobile devices and the great public adhesion to the new tools that make their lives easier, made the SaaS market great, currently, in the year 2022, only SaaS companies already accumulate an average annual revenue in excess of $100 billion and with an estimated growth of at least 20% per year, with the potential for growth to be greater than projected by large organizations.
Uber, Spotify, and even Google are well-known examples of companies that benefit from this business model (not all of them are 100%, some only a part of their sales). Revealing something quite intriguing: the average employee uses at least six apps throughout their workday every day, and companies themselves spend an average of $2,884 to maintain their SaaS subscriptions and boost their employees' productivity to the fullest.
Build To Sell
There is another way to earn money and rise socially in this market: building to sell. Many of the founders of SaaS tools, especially in the Micro-SaaS format, do not aim to have a large company that earns billions every year due to various factors such as the bureaucracy faced, the high number of employees needed to maintain and enable the existence of the company, forced to deal with managing people with training and conflict resolution, and running away from other legal problems that can arise due to lawsuits such as in the case of Uber, which faces justice in over 30 countries every month.
The idea of these founders is to build their SaaS products, increase their market value, and finally sell them to some other big company for a price that easily exceeds millions of dollars. It is a career in which the purpose is not to grow the products, but to build them, experiencing challenges that become functionalities that facilitate life in society.
If you have identified with this life profile, find out below how the value process that your company will have should be done, according to some important factors.
Calculate Valuation for My Company
The value of a company can be defined in several different ways, it depends on the type of business that will be put up for sale, a youtube channel must be valued in a different way than a medical office, and this is due to the model in which it is produced revenue while the former earns money through its audience and engagement, a medical office makes money by providing services locally and for each consultation performed.
The best way to know which format you have chosen to know the value of your company is to understand what type of venture you have, what is the average useful life of this venture and how it generates revenue.
Discounted Cash Flow (DCF)
The Discounted Cash Flow technique is basically an account that considers the estimated profit of the company for a given period (5 years), the estimate of perpetual growth at a small growth rate, the estimate of how much profit the company is worth, at this very moment and enter a discount rate at the end. The discount rate is something a little more subjective, it can vary depending on the market risk, level of indebtedness, and some other associated macroeconomic factors and characteristics of each venture.
DCF = Future Cash Flows / (1 + Discount Rate) Number of Periods
To be able to do all this, it is necessary to analyze the company's financial history in recent years, estimate an appropriate discount rate to bring the present value stream into the company today, perform some realistic actions on what the future profit will be, and also estimate some secondary discount rates, typically related to the size of the company, number of employees, and possible lack of liquidity.]
It is recommended to look for a specialist in the area because alone it will be difficult to have all these data faithfully to reality.
The model above was inserted more as a curiosity, the SaaS market has a common method when it comes to valuing a company in this market, called Seller Discretionary Gains (SDE). Basically, the expected ROI is estimated on the purchase of the business:
SDE = Revenue - Cost of Goods Sold - Non-discretionary Operating Expenses + Owners Compensations (Salary shares).
The value resulting from this equation is the expected gain for a SaaS company in a period of one year (before taxes), this number is multiplied by a multiplier assigned to each sector predicting its long-term market value. Historically, this business model falls into a range that starts at 3x and can go up to 10x, however it is common for the value sold to be 5x the current year's value.
It is standard in the SaaS market to sell the company for 5x the earnings of the last year, some choose to wait until their company is worth more, and others sell as soon as they get a buyer for fear that they could be swallowed by a highly competitive and constantly changing.
Whoever decides whether or not to sell the company will be the founder and owner, factors that must be taken into account can overcome the stipulated valuation barrier, the risk of the market changing drastically must be taken into account, cloud services, regardless of the size or location, when they grow to impressive numbers, they usually have to face the Big Techs, either receiving purchase offers or gaining a new competitor to match.
The create-to-sell model has become a very profitable and targeted field. The different ways of selling each SaaS company may vary although most follow the same rule.
Remember: before choosing a model to evaluate your SaaS company, think about the particularities of your platform, and consider the buyer.