How to increase your SaaS valuation multiplier In 2024
What makes knowing about Software as a Service (SaaS) important in today's competitive business world??
It is the evolution of SaaS. Software as a Service is more than just a buzzword; it's a game-changer altering how businesses and services are delivered worldwide. The global SaaS market was worth an impressive $257.47 billion in 2022, and industry analysts predict it will grow to $1298.92 billion by 2030. This expansion is supported by a remarkable compound annual growth rate (CGR) of 19.7 percent between 2023 and 2030. Notably, in 2022, major corporations surpassed small businesses as the primary consumers of SaaS.
The famous statement by investor Marc Andreessen, "Software is eating the world," holds truer than ever. SaaS funding has increased by over seven in the past decade, exceeding overall venture capital spending by nearly six times. This highlights the growing importance of the business. With cloud-based system usage at over 37%, SaaS is no longer a luxury but a need for businesses worldwide.
End-user expenditure on SaaS solutions is expected to reach $489 billion by the end of 2022, according to research firm Gartner.
Have you ever considered what factors can enhance the valuation of a SaaS company? Share your insights with us
How does Valuing a SaaS Company work?
Valuing a SaaS company can be complex, but understanding key factors can streamline the process. Here are important points to consider:
1. Seller Discretionary Earnings (SDE)
SDE is calculated as Revenue - COGS (Cost of Goods Sold) - Opex (Operating Expenses) + Owner Compensation. It is a valuable metric for businesses valued under $5 million with no extensive management team and slow growth rates. SDE accounts for owner involvement and various expenses, offering a more accurate picture of a small enterprise's earnings potential.
2. EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization)
EBITDA is a widely used financial metric that gauges a company's profitability. While it's not the sole determinant of a business's performance, it provides insights into profitability. Comparing EBITDA margins to industry averages helps assess competitiveness.
3. Revenue
Unlike traditional businesses, SaaS companies often invest significantly upfront to drive growth. Therefore, revenue becomes a critical factor. Lack of revenue data can impede accurate valuation, potentially leading to overvaluation.
Key Variables in SaaS Valuation:
Several key variables play a vital role in SaaS valuation. These metrics are essential for a comprehensive assessment:
SaaS Valuation Multiple Factors
SaaS valuation multiples are financial tools used to evaluate one metric in relation to another. They help make companies more comparable. However, the critical factors affecting these multiples include:
Important Metrics for SaaS Valuation
Two important metrics significantly impact SaaS valuation:
1. Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV)
CAC represents the cost of acquiring a new customer, while LTV measures the revenue generated from a customer throughout their subscription. A healthy LTV/CAC ratio, typically around 3, indicates a sustainable business model.
Do you think customer acquisition cost (CAC) and customer lifetime value (LTV) significantly increase SaaS valuation? We'd love to hear your thoughts.
2. Churn Rate
The churn rate, expressed as a percentage, measures the number of customers who unsubscribe within a specific period. A low churn rate, ideally below 10% and below 5% for an attractive investment, signals business stability.
Consider the following scenario involving two companies:?
one grappling with a 5% annual churn rate, and the other contending with a substantial 20% annual churn.?
The disparity in their revenue projections over a decade is evident. Given a continuous influx of new customers at an acceptable cost of acquisition, a low churn rate becomes instrumental in fostering steady revenue growth. This, in turn, enhances the overall growth trajectory and mitigates the risk of long-term devaluation.?
Conversely, a high churn rate yields precisely the opposite outcome.?
3. MRR ( Monthly Recurring Revenue) vs. ARR (Annual Recurring Revenue)
Balancing monthly and annual subscription plans is crucial. Selling more monthly plans can lead to higher valuations, as MRR is generally valued more than equivalent ARR.
Share your experiences with enhancing SaaS company metrics at different stages of its lifecycle. What worked best for you?
Are You Ready to Evaluate the Worth of Your SaaS Company?
Once you have finished evaluating your SaaS business, the next step is to think about your potential exit strategies. Hiring a professional assistant is recommended if you want an accurate assessment of your business's worth. Experts will thoroughly calculate the Seller Discretionary Earnings (SDE) profit and offer advice based on their experience with similar deals and a thorough firm analysis.
Eqvista will help you determine your company's worth. Eqvista is an application that gives you all the tools to analyze a company, make a cap table, and handle the shares. Learn more about our 409a valuation expertise by calling us today!