The valuation of any business is usually a depiction of how the business owner views their business. It is a representation of the owner’s interpretation of how different forces in the market affect their business. The value of the business therefore communicates more than just the financial outlook of the business as investors can use it to understand the business owner. This is why you need to take your time developing your business narrative and valuing your business. This article analyses SaaS Valuations: How to Value a SaaS Business.
What is SaaS?
Software as a service (SaaS) is a type of business where the entrepreneur provides and hosts applications for a fee. The business therefore involves the development of software, maintenance of databases and servers that then allow clients to access the applications over the internet. Most SaaS companies operate on a subscription basis which charge annual, quarterly, weekly, monthly or even daily subscription fees on the target clientele. But how do you value such a business?
How to value a Saas Business
The Multiple Method
In this method, the revenues of the business are calculated and then multiplied by a predetermined number, usually called the multiple. This method is ideal for small businesses and is usually guided by the age of the business, stability of the business revenues, client base expansion and trend, the quality of the content used, the revenue drivers and the monthly or yearly growth of the business. The owner’s involvement in the business may also have a great effect on the multiple. On average, the business multiples usually fall between 3 and 4.5.
The sellers discretionally method
This is usually calculated as the total revenue collected over a period of time, less the cost of goods sold and the total cost of operations, then you add back any remuneration paid to the owners as well as personal expenses covered by the business. This method is also ideal for small businesses that employ a few people.
Earnings before interest, taxes, depreciation and amortization
This method can be used to value larger SaaS businesses with many employees, clients and costs of operations. This method is usually taken as the most accurate business valuation method for these businesses. Experienced and skilled valuation experts may be called upon to enhance accuracy when this method is used. This method can also be used to predict with a certain degree of certainty the business trajectory for the next few years.
Incremental value
The aim of every business owner is to grow their business over time. As a business person, you need to value your business often in order to determine the growth trends, identify the areas where you need to put in more effort and the areas where you need to keep up the good work. Therefore, business valuation should not only be conducted when there is an imminent sale but on a regular basis. This also helps you develop data that could be used to market your business when you decide to sell.
Given the increased interest in SaaS businesses and e-commerce, it is essential to build a solid business from the beginning. It is also good to have in depth understanding of the value of your business in order to avoid embarrassing yourself in front of your investors or employees. If this is not possible, then you should at least understand the basics.
