Startup Valuations - Acquire.com Academy

How to correctly value your SaaS application. Now, through Microacquire, I've met more valuation experts than I can count. And really valuing your company as a founder is kind of an art. You know, some, a lot of buyers will say the typical market ranges that I see being discussed and really a lot of deals do get done with. This range is typically profit or SDE seller discretionary earnings, which I'll discuss in a bit. Add a multiple of 3 to 6, 7, 8x if your business is growing and it's a really, really good business. But the number one thing, as a seller, as a founder, what you want to do is you want to understand how you can justify your multiple. How did you get there? So you can explain that to a buyer, so you can justify the value of, of your business. Because that's essentially what a buyer is doing, is they're taking either a portion of your revenue and they're driving at a multiple with a clear valuation. Like, for example, when I sold business apps, the final sale price, like was down to the dollar. So it's important to have a valuation that's realistic and shows that you understand how to properly value your SaaS company. So I'm going to go over that right now. So for this next slide, you want to think about the right methodology. So every startup is different and you want to understand basically your estimated value and how that works is you basically are taking your earnings or profit and giving a multiple on that or your revenue. And I'll explain when those scenarios apply. So seller discretionary earnings is something that every founder should know, especially if you're a bootstrapping startup and you're profitable, specifically if you're profitable. So essentially what this means is basically you are taking your revenue, you are minusing your operating expenses and your cost of goods sold and you were adding back your salary. So if you, in this example, if you're running a million dollar, your company and you're paying yourself $200,000 a year, you can add that into your seller discretionary earnings and put a multiple on that. So let's say profit is 300,000 and your compensation is 200,000. So now seller discretionary earnings is 500,000. You can put a multiple on that of, you know, from five, six to seven or eight and have a valuation that you can justify. Again, evaluation that you can justify is so, so crucial when talking to buyers because there's nothing worse when you talk to a buyer and as a founder, you're just kind of saying, you know, annual recruiting revenue times 30. That's what I see in the markets. And that's. That's going to turn buyers away pretty quickly. So moving forward, if you use even DA or se, even now is just a fancy word for profit. There's some other stuff in there like depreciation, but if it's zero, you definitely want to articulate that to buyers because that essentially means that you were investing heavily in growth. And that's essentially a lot of what I did personally at Business Apps was I would run the company break even a lot of years because I was growing the business heavily, sometimes even at a small loss, even though we bootstrapped the company because we were again growing the business. And so you can get a multiple on revenue, but you need to understand when that scenario makes sense. Is the spend actually having an impact on growth? Can you articulate that to the potential buyer? That is absolutely, really important. So I'm not going to go through the whole details here. All of these presentations are available. If you want to read these. We have ebooks available as well. But the main takeaway is really understanding when to use the multiple on ste or even, or whether you give a revenue multiple. So again, if you're not profitable, but you're growing and you're investing heavily in growth, it may make more sense to put a multiple on revenue, but you're just going to need to have a way to justify that. Now, deciding the multiple. I just kind of mentioned this a little bit and again, I could definitely talk about which one is right for some buyers. And this is important to understand as well. For some buyers, they have a range where they'll only acquire businesses in a certain range. So on Microacquire, a lot of buyers are looking for businesses that have a valuation that they can justify and it's in the range of, you know, five to eight or something like that, that will attract a lot of buyers because that shows that you understand how to properly value your company. There's also, you know, so many things that you can calculate in, like your churn and your lifetime value. But that initial valuation that set in reality is so crucial to showing buyers that you are interested in having real conversations. They can go up, you can get a ton of different offers from buyers. That should kind of be your goal, is pricing the startup correctly, getting a lot of people interested. And then from there, if you receive multiple letter of intents, you can create a mini bidding process and increase the price based on that. But if you come out of the gates with a valuation that you know you're doing a million in revenue and you want 10 million for it. That's gonna turn on a lot of buyers. Unless you sell to a strategic buyer and you have some revolutionary IP and your team is just full of like. Those acquisitions are way more rare, but they're definitely possible. But that's kind of how you want to be thinking when you decide on the multiple for your startup. And just a little bit of, like, data too. Crunchbase reported a medium multiple ranging from 4 to 10, with an average of 6.69. Now, most of this data too is for funded companies. So for bootstrap companies, this data isn't readily available. So a lot of the buyers of these companies are typically strategic, so they will sell for a higher valuation. But a strategic acquisition is a much lengthier process. It takes a lot of. It's just, it's a different beast. And there's a lot of strategic buyers on Microacquire. But to get within those multiples based on revenue, you need to really be showing a lot of growth. That's basically it. And then a strategic buyer could justify the cost of bringing this into the business, really cranking the knob on growth even more, reinvesting into the business. So I'll talk about this more in other parts of this, but understanding the intentions of the buyer and how they're getting at their multiple is equally as important. So like I was mentioning, there's so many factors that go into evaluation, like your churn. If you have negative net churn, you can command a much higher multiple if you understand simple things like your customer acquisition cost, your lifetime value. As a person who's even acquired a few small SaaS companies myself, these are things I look at first. Basically, how many customers are using the product? How many customers are renewing? Are they happy customers? What is the lifetime value of each customer? What is the customer acquisition for each customer? Is there opportunities for me as a buyer to potentially accelerate this or reduce spend? So, you know, understanding, you know, why these metrics are important and really being able to explain those to buyers. What are they? How have they been trending? What have you tried? Those are just some thoughts off the top of my head and then bringing it all together. So decide which methodology is most appropriate. Are you going to add a Multiple based on SDE or even DoT or Revenue? SDE typically is the industry norm and that is good in 99% of cases. If you're a business that's growing like crazy, multiple on revenue probably makes more sense. And then look at other ranges that you see from other businesses selling that's in your market. If you're in a really, really fast growing market, businesses might be selling at a much higher multiple, and that should definitely be taken into account. So, all in all, pricing and valuing your startup is there's no exact way to do it. And so the most important thing and the most, the best piece of advice I want to get across is really understanding just how important it is to explain how you derive to the multiple. So buyers trust that figure. So you are essentially showing a buyer that I've kind of done my homework. This is kind of the range of what I see similar companies selling in my industry. And this is what I landed at, rather than just taking your revenue number and timesing it by a really high amount. Because the more you can get within market multiple ranges, the better.