How to Increase The Value of Your SaaS Company for An Exit?

If you're looking to exit your SaaS company one day and get the maximum amount of value in what you sell it for, today we're going to talk about some five different ways in which you can increase the valuation of your company and make it more attractive for an investor or inquirer. My name is Akhil Jabbar. I am the GP and Investment Director at Horizon Capital, where we help. SaaS companies unlock their true potential. Hey guys, welcome back to another video of SaaS District. On today's episode, what I want to talk about is how can I increase the value of my SaaS company before I go out and try to get an exit? I want to make it as attractive as possible for investors. That is a question I get asked often, is, hey, I want to sell my company, but I don't know if I'm going to get the maximum amount of valuation And get the highest multiple so I can get the most of what I built over the last couple of years. So I'm going to talk about 5 different things you can focus on today to start improving your company so when you're ready to sell, you're going to get the maximum dollar on your investment. And obviously is your financials. That's the thing that people think about as the most obvious. So there's a couple of things there. What we look at is your growth rate. How fast are you growing? Are you just growing— 10%. 2-3% year over year? Are you growing 20, 50, or even 70, 100% year over year? That's going to make a big, big difference. Okay, ideally you want to keep growing, showing your company sustainable and will continue to grow even if you decide to sell it. So if you're doing at least 30% year over year, that is usually an attractive number to be in. Other things that investors look at is your cash flow. Are you actually producing cash in which you can pay back investors? Do you have recurring revenue? How much of your revenue is recurring? Are your clients sticking around and staying on for the long term, or are they churning and canceling for the long term? Ideally, you want at least 90-95% of your clients who are renewing on an annual basis. And finally, obviously, your EBITDA or your gross margin. Those are things we look at. So depending on the size of your company, you can, you know, we do calculations of EBITDA or seller discretionary earnings, which is SDE. Which you add back all these one-time expenses that wouldn't be continuously occurred by the new owner. So you want to make sure you have a healthy margin and that your EBITDA is, is solid. You're a profitable company, and companies will pay more for companies that are, are more profitable. So look at those factors and make sure all those are trending in the positive trend and your financials are growing on an annual basis. All right, so that's number 1. Number 2, Operational metrics. Okay, so these are different things that— how are your— how is the business actually operating? Some key metrics that SaaS companies need to pay attention to are LTV, which is your lifetime value. How often is— how much is one customer worth to you, and what is the value of that client? Okay, what is your churn percentage? Okay, churn is a big, big factor out there in which companies are looking at, or potential buyers are looking at. A number you want to be in ideally is under 5% per month. That's your user churn. Less than 5% of your users should be churning. If you can get that to staying in those single digits, so 1%, 2%, 3%, even negative churn, if you can get to negative churn, your valuation will be much, much higher. And tying back to that, that'll increase your lifetime value. If your customers are staying around, they're not canceling, they're recurring, they're paying month over month, what will happen is your LTV or lifetime value will increase proportionally to that. So there are a lot of people who have double-digit churn. If you're focusing on SMBs, so I mean small and medium-sized businesses, if that's who your target audience is, typically you'll see, you know, a little bit higher, maybe 5, 6, 7%. There are companies out there who are now double digits I've spoken to. They are focusing on SMBs and their, their, their churn rate is, you know, 10 15% month over month. So that doesn't look good at all. That's a scary and high risk, considered high risk for a buyer. So you want to try to figure out how to get that down to at least below 5%, ideally, you know, less than 2%. Another key metric to look at is your cost per acquisition cost. How much does it cost to acquire one customer? And what's really important here is that's fine even if you spend, let's say, $1,000 to acquire a customer or $5,000 What matters is your ratio. What's your CAC to LTV ratio? Okay, if it's costing you $1,000 and your lifetime value is only $2,000, means I have to spend $1,000 to make double my money, which, which is fine. But ideally you want to be at least 3 to 1. Okay, so 3 to 1 is the ideal ratio. If you can get 5, 9, 10, or even higher, you're laughing and you're in a healthy position. And obviously other numbers are your MRR. How fast is your monthly recurring revenue? How much, how is your ARR looking at? You don't want just one time, you don't want a bunch of annual one-time payments. People like that recurring MRR, recurring revenue come in. Okay, so that's number 2. Make sure your operational metrics are in line and are healthy for a seller. Number 3, the market. Obviously the size of your market and is your market in an increasing space or in a decreasing? Are you in declining market where people are spending less money? In that industry, then that's something that, you know, would worry any potential buyer because the trend is that people are not going to be continuing to buy your product. Okay, how many competitors are there? Is there more and more competition coming out there? Is there a clear market leader? I would actually say, you know, competition isn't a bad thing. If you have a lot of competitors coming out or there's already existing competition, it just means that there's a clear market fit and demand for your product. So just make sure that you're in the, you know, you have a potential to grow and be a market leader in this space. And then finally, your TAM, your TAM, your total addressable market. So how big is that market? How big is the pie? Are you serving only, you know, is there only 1,000 potential users that you can sell to in the entire world? Maybe that might be too small. You want at least, you know, a couple hundred thousand or millions of users who you can reach out to, whether it's SMBs, mid-level, or even enterprise. If you're working enterprise, obviously your TAM will be a lot smaller, but you want to make sure you understand what is the size of the pool. Is it growing? Is it going to be consistently growing year over year? And is it going to be inclining versus on a decline basis? Okay, so that's number 3: how big is the market and is it continuing to grow year over year? Number 4: The quality of your product or your services. Okay, how strong and attractive is your SaaS product? What's the quality? How are the features? Do you have the same amount of features as your competition? How's your onboarding process? How's the code? How's the quality of the code? Did you outsource everything to another company to build your code, or do you have a CTO on board who created high-quality code using the latest latest software and code so that any other developer can come in and work on it. So that's considered high risk if your product is poor. How is the user UI? How is the user experience when they come in? How long are they sticking around? What is the NPS score, your Net Promoter Score? Are people raving and sharing your product? Are they happy about it? Are they leaving positive reviews? So overall quality. And how difficult is it for somebody else to come in? How high is the barrier to entry? So if I want to come in and copy your product, is it going to take me a week and a developer to copy it? Or is it a lot of— do I need to hire a machine learning engineer? Do I need a Python developer? A, you know, front-end, back-end, mobile? Is it going to take me a year or 2 to even catch up to where you are today? Okay, so the more difficult it is to replicate, obviously the higher valuation you'll get on your business as well. Lastly, guys, the most other important point you want to look at is your company profile and your organization. How strong is your team? Do you have a solid team in place that can handle everything on the day-to-day basis? Are they competent? Are they experienced? Do they know what they're doing? And will they transfer over to the new owner? Okay, owner involvement. How much is the owner involved? Is the owner still doing all the sales? Are they doing all the marketing? Are they working full-time, 40 hours a week into the business? That's considered actually higher risk. You want to replace yourself and your roles and responsibilities across your team as quickly as possible and have documented SOPs and training guides so that if a new owner comes in, he can just step in right away and start taking over. So they consider it high risk if I have to take over your job and figure out what you're doing. And you're doing everything. If you're doing sales, marketing, and you don't have a VP of sales, you don't have a VP of marketing, you don't have a customer success manager— those are all things that now the new owner has to come in, figure out, and has to hire and put back those costs and becomes considered higher risk. Okay, make sure you have a technical developer, whether it's a senior developer or CTO, who can stick around and help with the new owner, and your sales, marketing, customer service is all managed by your team. And you're there more of just an oversight and not managing the day-to-day. And last point here is the age. Ideally, you want to be at least 3 years old. The younger the startup and business, the higher the risk it is. There hasn't been shown predictability, it hasn't been shown predictability, it hasn't been shown consistency, and it hasn't been shown as a proven business model yet. Okay, so after three years, you're now considered less risk. You're higher stability in your business. You know, the longer you're around, obviously they're showing that you have demand, you're growing. So the age is important factor. So if you're looking to sell, you know, look at you know three, four, five, maybe seven years down the line when you've built a solid business and shown performance year over year. Okay, so guys, that's it. That's the five steps here. Okay, so financials. Operational metrics, the market, the size of your market, how good is your product and your service, and how is your team set up today? Okay, so these are all things I want to challenge you guys today. Look internally to your business. What are some one thing here that you can focus on to improve? And hopefully you guys can get out there and get the best valuation. All right, so if you enjoyed this video, guys, please leave a comment below on what you're going to focus on today to improve your SaaS business. improve the valuation of your company. And make sure to subscribe and watch the next episode of SaaS District. Thank you.