How to value your bootstrapped SaaS business.
Terms and considerations you should know if you’re thinking about selling your SaaS now, or in the future.
By Chris Reedy
VP of Acquisitions
The short story on SaaS valuation is that the market determines the value of your business. In other words, your company’s value is the point where what you’re willing to sell for, and what a buyer is willing to pay meet. Selling a business is really similar to selling a house in that way.
As a founder, you obviously want to sell for the highest number possible, and a buyer wants to buy for the lowest reasonable number possible. But there’s a sweet spot where the founder gets a dream exit — not just a good number, but also a good outcome for their customers and team — and the buyer gets a fair price. With 30+ acquisitions under our belts, and ongoing relationships with many of our founders, we’re confident that we know a thing or two about that.
But how do you come up with a value range that covers that sweet spot?
The basic math behind a bootstrapped SaaS valuation
If you’re looking for the most basic method of valuation, there are two simple formulas most buyers (and sellers) use as a starting point to determine the value of a SaaS business.
SDE-Based SaaS Valuation (Most common)
Seller’s Discretionary Earnings (SDE) x a Multiplier
= Your Approximate SaaS Value
Revenue-Based SaaS Valuation (Less common)
Revenue x a Multiplier
= Your Approximate SaaS Value
Calculating your SDE
Business profit before taxes
+ founder(s) salary
+ founder(s) benefits
+ adjustments for any other non-essential expenses
It’s important to note that your SDE will be calculated and verified using your tax returns and P&L’s, so you need to have your financial records in order.
If you’ve been in business for more than 3 years, expect to share the last 3 years. If you’ve been in business for less than 3 years, expect to share the full financial history of the business. (Here’s a more complete list of what you’ll want to have done if you’re serious about preparing your business for an exit.)
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Ballparking long-term value with SDE multipliers
Getting back to the original formula for valuing a bootstrapped SaaS business using SDE — it’s time to look at the multiplier part of the equation. If SDE is an attempt to measure how much cash a business can bring in to a new owner, the multiplier is a measure of the business’s long-term potential value.
For smaller, bootstrapped SaaS businesses (that are profitable and growing) those multipliers tend to range between 3x and 5x.
Businesses with higher profit margins, TAM (Total Addressable Market) and YoY growth rates, and lower customer and revenue churn will have multiples on the higher end of that range.
On the outside of that range, a lower multiplier can come into effect if the business is flat, or declining. Or multipliers could spike past 5x if your YoY growth is insane, or in a strategic acquisition (more on those in a moment).
However your current math works out, be careful that your margins and growth rate take into account your current reality. Sure, in theory any business has the potential to double in size in the next year. It also has the potential to lose half or all of its customers in the next year.
A note on revenue-based valuations for SaaS companies
If a company is in the very early stages when it’s acquired, or it’s growing more than 50% YoY, it may make more sense to do a revenue-based valuation since there’s not a stable history to look at with SDE.
It’s also worth noting that different buyers can put vastly different valuations on a business. Smart buyers aren’t just buying history, they’re also buying what they think they can help the business become in the future.
There’s going to be a big difference in the ‘fair’ price between buyers that might bring very different goals, assets, and strategic direction to a given business. One oversimplified way to look at this is that some buyers are ‘strategic’ and some are ‘financial.’
‘Strategic’ buyers may be able to get more long-term value (and therefore be willing to pay a higher price) because there’s a good fit with other ways they’re already making money and/or serving customers.
That’s why ‘strategic’ buyers might put a purely revenue-based or even technology-based valuation on a company. But these types of buyers also typically only want to buy bigger companies, so they don’t usually come into play with smaller SaaS deals.
A purely revenue-based valuation also indicates that the buyer will radically change the operations and cost structure of the business they’re acquiring, so they ignore the current ops and cost structure.
It’s also worth noting that there’s a big difference between paper valuations and cash valuations.
At SureSwift, we’re mostly a financial buyer — that’s why we price primarily based on earnings and use the SDE method for cash valuations — and we look to extend on the strengths of bootstrapped SaaS companies by keeping and growing the teams who have made the company successful. We think we’re pretty good at operating companies and extending growth, which means we can pay (a bit) more for companies we feel confident about growing.