How to Value A SaaS Business | With Jaryd Krause

So let's talk about valuations, right? Because I think that's another question people want to ask. Okay, what should I be paying for this? You have different types of websites, different performance factors, different factors you look at, as well as like the industry, the niche you're in. the market. How are you generally valuing SaaS businesses through your acquisitions? And then how do you compare that to the other business models? Would you say they're pretty similar?

Not similar. There's a specific reason. Dropshipping business, or I wouldn't say just dropshipping, but e-commerce businesses sell for lesser. And usually the Less a business sells for has usually more risk involved. Now, when you're buying an ecommerce business, you really need to understand how to do marketing. You need to be good at it and/or have an agency or team that is good at it and you're confident and you can rely on them. So ecommerce, and people can just come in and it's pretty quick and easy to create an ecommerce business, start it up, and somebody be your competitor. So you have that risk as well. So those multiples are lower. And then I would say you've got content sites in the next, and then you would have SaaS and membership. And the reason SaaS is different to those other 2 and the multiples are higher for SaaS and membership is because if you think about it just logically, you're buying a database of people that are paying a recurring fee. You've got recurring income off the bat. You don't need to make one-time sales like in e-com. And also in content, you don't need to keep having more traffic to come to the site to make affiliate sales and ad sales. You've already got people making that, right? It's just what you do with it next is another story, but the risk is decreased. In my opinion. There's also risk within that business model where you should have a developer do due diligence on the actual software and make sure it's not out of date and make sure it's not going to cost you a lot of money to update it and change it and make changes and hire a developer to do so. So there is due diligence to be done in all of these businesses. So I wouldn't say just go away and buy a SaaS or membership business because it's they're a higher multiple and less risk. Well, there's different variations of different risk.

Right. And can you give us some quick numbers on what those different valuations look like? So e-com, what are you paying? I'm assuming based off EBITDA. And what is it on SaaS? Can you give those quick ranges?

Yeah. We'll just stick with EBITDA. So e-com, you can— and again, this is variant on different businesses. And you can have e-com businesses that like have people recurring and paying. Like if you're selling a perishable like toilet paper or toothpaste and people need to keep buying them or shaving, whatever it is, that's a good e-commerce business. I would change it into a membership myself personally. But let's— yeah. So just a heads up when I answer this, it's very business dependent. Ecom, you can be paying a multiple of 2 years, right? 2 to 3 years, sometimes 4 years. When you're ecom— I'm sorry, that's ecom. Content or media businesses, you can be paying anywhere from 2 to 4, maybe 5-ish years.

Okay.

And then with SaaS, you can be paying anywhere from like 3 to 5 or even 6 years, right? Like this and up. It's when you really see the multiple difference go change and increase when you go from e-com and content to SaaS. That's evident. It's very evident.

Yeah. That's generally what we're seeing as well and what we're paying when we're looking at SaaS businesses where I think we're, especially at our size, I think we're like 3.5, maybe 5 to 5.5. Yeah.

You might have seen some people pay like 7, right? There's hedge funds and stuff, especially in your space, the capital that can get raised. And if they've already got a platform business, which is a— I don't know if you want to get into what all that means for private equity, but if you've got another business that you can bolt on to the business you're purchasing and it's It's in the same niche. It's just, wowza, the ROI is great.

Yeah, yeah, exactly. That's a different strategy. But I think for those people who have that capability, I think it's huge. What's your general kind of offer structure on these online businesses? Are you generally paying 100% cash upfront on these deals or how do you like to structure it for managing the risk and the risk with buying any business?

It depends on the size of the business. Anything under— anything around or under the $100,000, $150,000 is usually cash. Then you can supplement that with getting an SBA loan in America, and you could possibly do this in other places. The financing isn't very open. and abundant for buying online businesses, basically. The banks and institutional lenders aren't seeing these as assets yet, which is just weird because they make so much, probably more money than if you look at the data, than rental properties and stuff like that. But anyway.

Yeah.

That's a side subject. Mostly all cash. If you can do finance, great, because that's, you know, it's a longer drawn-out process. Then you've got different structures where you can do seller financing and you can put a percentage down payment and then pay out, you know, per month over, say, a 3-month or 6-month period. It depends on your terms and agreements with the seller and how flexible the seller is as well. That also really decreases your risk because You've also got the owner tied to the business still whilst you're making those repayments. Normally, we'll see that a down payment will be 60% to 90% of the business price, and then the rest will be repayments over a certain period of time. So that's seller finance— that's— sorry, you can do that as an earnout, and then you have seller financing, which is doing the same structure, but you're paying interest on repayments. And then you can also have seller notes or calls, and where if the business underperforms, you pay lesser for your repayments, or the business performs higher throughout the repayment period, then you can pay a little bit more as well. And this could work in your favor if you have the owner teaching you what you need to do to grow the business and you're making repayments. and if you hit a certain level, you pay more, the owner will be more likely to really motivate you and push you and give you great information and education on how to grow the business so they can get higher payments as well. And it's a win-win for both.

Exactly.

What I would suggest for somebody that is going to go down that route is don't do the yucky thing of I'm going to grow the business to this certain level and I'm going to stop putting my energy and input into it. That's just not good. That's just the owner, the previous owner is going to know that. And you just, what you're going to do is you're going to ruin your reputation. And reputation is, I say, and your relationship, your relationships are everything. and can be more valuable than the business you end up purchasing alone, because what opportunity can come from that relationship, even not directly with that person, but relationships with that seller and their connection, the opportunities can be incredible.

Makes sense.

Don't ruin your reputation by doing these yucky, seedy things.

Yeah, hiding revenue and whatnot to not pay the earnout. Then also in Canada, they have BDC. I know they're also starting to open up and they're looking at more deals. They're open to this space. So I think it's getting interesting times, but I think we still have a long way to go before the more traditional banks are looking at these deals, right?

Yeah.

Yeah. So for those in our audience, maybe they're looking to build their own online business portfolio like you have, or you teach some of your clients, and also build that lifestyle as well. Where should I start looking, and where are the best places that you recommend? Is it brokers, or, you know, off the market? Should I talk to my friends? Where should I be looking?

When you're first starting, if you just start, I mean, if you've got a bunch of friends and you're already in business, definitely go to your, get some private deal flow and go to your private network. Most people starting this, they probably just heard like, wow, okay, I can buy a business. What you don't want to do is you don't want to go to a marketplace where people can self-list their own businesses for sale. You run into problems there where you look at a bunch that look good, but you do due diligence and you're just wasting your time because a lot of those listings are dud listings and I like to call them lemons. People will be buying lemons. I only suggest going there if you've got experience, you've bought a business before, you know how to do due diligence. If not and you're just new to this, go to Google and type in websitebrokers.com and there's so many. There's so many. People listening to your show, they've probably heard of feinternational.com. They sell a lot of SaaS sites. You've got empireflippers.com. You've got motioninvest.com. You've got quietlightbrokerage.com, investorsclub.com, or investors.club. Check out those guys. But yeah, there's a lot. There's just more and more people coming up.

Cool.