SaaS Valuation Multiples Explained | With Examples
“Thinking about buying or selling a SaaS company? In this article we explore SaaS valuation conventions and models. “
Written By Sterling Sweeney: Published Feb 24th, 2020 | Updated Feb 24th, 2020.
Sterling Sweeney is a growth hacker and the driving force behind WhalePages, a SaaS marketing agency ⚡. Today, he focuses on talking about the SaaS valuation multiples.
11 Minute Read
“Own a SaaS with under 10mm ARR? Here are your options when it comes to valuing and selling your SaaS company 💸. Brace yourself to feel a little sad by the end of this article.”
A few years back, Trello, a team collaboration and project management tool, sold to Atlassian for 425 million dollars (Atlassian’s biggest acquisition to date). Around that time, Trello was making in the ballpark of 10mm / year in recurring revenue (source). This means Trello was purchased at roughly 40x its yearly earnings. An impressive feat as far as SaaS acquisitions based on earning multiples go.
Reading through a case study like this has the potential to cause a bit of confusion among the ranks of SaaS founders who may be led to believe that they can take their $10,000 MRR SaaS company and cash out for three, four or maybe five million dollars.
Stories like the Trello story lead many SaaS founders to believe that they can 10x, 20x, 30x or even 40x their current ARR (Annual Run Rate) by selling their SaaS to frenzied investors with more money than sense. However, this rarely happens. In fact, if your SaaS company is currently under 10mm in ARR, this article will help you re-calibrate your valuation expectations. The truth is that Trello is a bit of an anomaly in the SaaS valuation space. It makes for a fantastic tech story, but it shouldn’t be used as a valuation benchmark.
If you have a SaaS and you’re currently under 1mm ARR, you’re likely not in the ballpark if a 40x, 30x, 20x or even 10x valuation. Instead you’re likely in the ballpark of a….. wait for it…… 1x to 2x valuation. 3x if you’re really onto something special. 😭
Excited? Let’s jump in!
SaaS Valuation Multiples Vary Greatly Depending on Your ARR
Generally speaking, valuation multiples tend to increase as a SaaS company’s ARR increases. For example, in the vast majority of cases, small SaaS companies with less than 1mm ARR are likely looking at an ARR multiple of 1 to 3. The final multiple will be heavily dependent on many different factors. Considerations such as your sector, IP (Intellectual Property), YoY (Year over Year) growth rate, churn rate, and LTV (Customer Lifetime Value) will all play a major role in determining the valuation of your sub 1mm ARR SaaS company.
Generally speaking, the more defendable assets you own, the longer you’ve been in business, the more predictable your revenue stream is, the faster your growth rate has been, the stronger your tech value is, the better your team is, and the stronger your sector is, the higher your valuation will tend to be.
On the next rung of the ladder, there are SaaS companies that have a bit of history behind them (i.e. have been around for at least 3 years) and that are earning between 1M to 10M ARR. These companies could potentially see a 2x – 4x valuation. Again, the valuation will be heavily dependent on all of the variables mentioned above.
SaaS companies only start getting into 6x – 8x valuations (maybe 10x if the conditions are right, the market is in a bit of a frenzy or the buyer has a strategic use for the acquired asset) when you start looking at companies with more than 10mm EBITDA and exceptional growth rates (roughly 30% – 60% YoY growth).
Private vs. Public Valuation
These valuations might seem unusually low to investors who are accustomed to looking at the valuation multiples or the Price to Earnings Ratio (P/E ratio) of publicly traded companies. It’s not uncommon to have much higher P/E ratios in public markets. For example, the average P/E ratio of companies within the S&P 500 Index has historically ranged from 13 to 15. This means that companies within this index tend to trade at 13 to 15 times their yearly earnings. Other companies have much higher earnings multiples. Apple’s P/E currently hovers around 20x . Google’s hovers around 30. And Popular SaaS company Salesforce has a P/E ratio that hovers around 180!
However, public valuation models don’t translate over to private markets. They are entirely different investment spaces. Apples 🍏 and oranges 🍊 folks.
SaaS Founders Try to Squeeze In Additional Value to Increase Their Valuation Multiple… Often with Lackluster Results.
SaaS founders, knowing they are dealing with the reality of low valuation multiples, often try to squeeze more value into their SaaS by trying to inflate the perceived “value” of their SaaS to investors. They will often try to factor in the true hourly rate of the time they invested into their SaaS. They often also try to value the early struggles they went through that the new owners won’t need to go through (ie. finding product/market fit, fixing bugs, getting their sales pages ranked high in organic search, building up a positive reputation online etc). All of these things do hold real value. The problem is that investors tend not to want to pay very much for them unless the benefit somehow spills over into MRR.
SaaS founders also often try to sell investors on the perceived “potential” value of their SaaS product.
For example, here are a couple of SaaS companies for Sale on Flippa. The first example is for a SaaS company that hasn’t made any revenue yet but apparently has HUGE potential.
Here is another seller’s listing who has a SaaS company that is making $24 / month. In their listing they try to sell the SaaS for its theoretical potential to make $1000 / month.
Hard-to-measure intangibles (especially things like “potential”) mean very little to investors when it comes to financial valuation. I’ve watched many SaaS sales and auctions play out and most are pretty heavily grounded in sound financial principles. Of course, there will always be outliers and exceptions, and sometimes hard-to-measure business intangibles do get taken into consideration. But for the most part SaaS companies sell within predefined ranges based on growth and MRR (Monthly Recurring Revenue) or ARR (Annual Run Rate) models.
Sometimes you see emotion or excitement work its way into the sale near the end of the negotiation process, but for the most part it’s a pretty calculated and controlled process. Investors tend not to value a SaaS company based on a seller’s perceived value of their own SaaS product. Investors tend not to build valuation models around abstractions.
Valuation Based Off Trailing Twelve Months (TTM)
Generally speaking, when buying companies, investors look at the TTM (trailing 12 months) of revenue.
That said, for younger SaaS companies the trailing 12 months can be a problematic metric for both buyers and sellers. What if within the last three months the SaaS company’s growth has exploded? Or, what if growth is flat or has been in slow decline?
Also, it should be mentioned, when buying smaller companies investors tend not to look at ARR. Instead they look at SDE (Seller Discretionary Earnings). This is the money that the SaaS owner has left over at the end of each year (yearly salary is included in this as well).
So if your SaaS is doing 10K MRR and you’re taking home $5K in revenue each month after expenses, your valuation multiple will be based on a number closer to $5K than $10K.
Valuation is a sensitive subject for all parties involved. Both SaaS founders and investors have said countless times that the SaaS valuation process tends to be equal parts art and science.
For example, above we provided ranges of expected SaaS valuation multiples based on current ARR. The difference between 1x to 2x valuation might not seem that significant on the surface, but for founders it could be the difference between a major win and a total disaster. It could be the difference between having enough runway to get your next project off the ground ✈️or failing to get your tires off the tarmac and crashing at the end of the runway 💥.
The truth is that a 1x or 2x valuation doesn’t buy you a lot of time. A year or two can fly by, and if you don’t have something else successfully developed, launched and profitable within that time, you could find yourself in a very uncomfortable financial situation.
Where to Go to Sell a Small SaaS Company?
Knowing how fast time flies, if you still want to sell your SaaS there are a few platforms that will allow you to access a network of potential buyers and investors. For example, many SaaS founders list their SaaS companies for sale on Flippa, EmpireFlippers or SideProjectors.
Flippa is the most popular option, so let’s look at some historical sales data over on their site.
SaaS Valuation Comparables (Comps)
Digital asset investors look at comparables (or “comps”) when making buying decisions. So let’s look at some publicly available information on the sale of some recently sold SaaS companies.
First of all, this projects leads me to believe that there is no niche untapped by the SaaS industry.
This SaaS company offers a software solution to bunny breeders 🐰. You might think they took the advice of niching down a little too far. However, during the time of this sale, BarnTrax was making $2841 / month in net profit and had 34% YoY growth.
This SaaS company had three bids and ended up selling for $85,000. This was a very successful sale and had a much higher valuation multiple compared to other SaaS projects sold on the platform.
Monthly Net Profit: $2841
Sale Price: $85,000
MRR Valuation: 29.9
ARR Valuation: 2.5x
ArbitrageProfitSpy 🕵️ is another example of a SaaS company recently sold on Flippa. It’s a dropshipping research SaaS company that helps droppshippers find high performing products to resell at high margins. This is an interesting case-study to examine because this SaaS brings up some challenges with regards to using TTM (Trailing Twelve Months) as a guideline. For instance, this SaaS experienced a massive growth in sales during the last 3 months. The seller will want to establish a multiple based on those higher numbers. Therefore, the seller and buyer might need to establish a shorter trailing metrics (i.e. Trailing Three Months) to fairly value this SaaS.
Monthly Net Profit: $4695
Sale Price: $74,000
MRR Valuation: 15.76
ARR Valuation: 1.31x
Next, let’s look at a bulk email list verification SaaS that was making $1732 / month in net profit. This SaaS ended up selling for $35,000 which is 20.2x MRR valuation (1.68 ARR valuation). Again, look at the financial charts below and notice the consistent month after month growth.
Monthly Net Profit: $1732
Sale Price: $35,000
MRR Valuation: 20.2
ARR Valuation: 1.68
These are just three examples to help show the ballpark ranges that smaller SaaS companies sell for in today’s market.
You can search Flippa for comparables by searching for keywords and then filtering results to show only “sold” businesses. This will allow you to see transactions that actually finalized. As you can see, these small SaaS companies are generally selling for ARR multiples of around 1x to 2x, which is in line with our valuation ranges we discussed above.
Generally, you’ll start seeing higher valuations when the purchasing company has a strategic purpose for the acquired SaaS. For example, they might have a company in a related niche and they believe the SaaS’s built-in audience will provide additional value in their existing customers. If you’re curious to know a specific value range for your SaaS company, you can use our SaaS valuation calculator to help give you a ballpark range of your SaaS’s value.
The Market for Young SaaS Companies is a Buyers Market
At WhalePages we’re firm believers that the market for small SaaS companies is much more of a buyers market than a sellers market.
I personally think there is huge potential in the world of small SaaS acquisitions. Many of these companies are poorly monetized and/or poorly managed. When I look at many of these projects, I see great ideas with poorly executed SaaS marketing strategies. They often become distressed because the founding team (generally one or two people) are programmers and not entrepreneurs.
Their failure isn’t often due to a bad idea. It often boils down to the founders not having the business skill-sets that is required to grow a SaaS company.
If you’re a business turn around artist or you have a knack for growing 🌱companies you can often pick up distressed, poorly monetized or under marketed projects for a very low valuation (1x earnings for example). Investors can often turn these projects around quickly and make their initial investment back within 3 to 6 months.
However, due diligence is key. Most of the SaaS companies we see for sale are for sale due to partner difficulties, SaaS founders being spread too thin on too many projects, founders selling due to the need to pay off debt or founders selling due to loss of interest in their project.
However, some people are trying to sell because their project is in the process of sinking 🕳️. A big competitor could have entered the market, their tech stack could be becoming outdated, they could have lost API access to an important part of their platform or they could be facing legal problems. We’ve read many horror stories about people buying SaaS companies only to be totally overwhelmed with problems once they take control and have the opportunity to look under the hood.
The Exit is Overrated
In a lot of cases, SaaS founders with positive cash-flow SaaS companies are better off keeping their SaaS companies and growing them (for a better valuation later on), or just to keep them as passive income generators. With very exceptions I don’t think that a 1x to 2x valuation is something that SaaS founders should be lining up for.
I hope you’ve enjoyed this article. If you’re a SaaS founder and you’re looking for ways to boost growth I’d suggest you head over to our homepage to learn how WhalePages can help boost your organic ranking and website traffic.
Written By Sterling Sweeney: Published Feb 24th, 2020 | Updated Feb 24th, 2020.
Sterling Sweeney is a growth hacker and the driving force behind WhalePages, a SaaS marketing agency So, if you have a SaaS company and you’re kinda into things like website traffic and increasing your MRR, then be sure to check out our homepage.
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