[PDF]A Complete Guide To Saa S Valuation Blog Pdf

A Complete Guide to SaaS Valuation:
Methods, Techniques, and Best Practices


A Complete Guide to
SaaS Valuation:
Methods, Techniques,
and Best Practices


MY (vacua


April 13, 2023 | Valuation


What's your SaaS company's worth?


This is an important and complex question for any SaaS business owner. SaaS
valuations can be complicated; however, understanding the economic value of
your company is increasingly important if you want to raise capital or sell a
portion of your business.


But just like most complex mathematical problems, SaaS valuation is impacted
by a variety of factors such as industry performance, business model, value
proposition, stage of growth, and much more.


More than that, there's not only one single way to define your SaaS company
value; rather includes various SaaS valuation methods, metrics, and formulas
that altogether help identify a company's final value.


Luckily, that's what you'll learn in this blog. Below we'll help you understand
what is SaaS company, different types of valuation, important metrics, and
most importantly, how to value a SaaS company, its formulas, and methods
that will help you do the math.


What is Saas?


SaaS means Software as a Service.
Becoming the largest and fastest-
growing market segment in recent
years, many businesses now offer
service globally through a web-based
application using the SaaS business
model.


SaaS company uses software to host a Y
n application where customers can a
ccess their service remotely without
any restrictions.


What is a SaaS Valuation?


SaaS Valuation is a significant concept for business owners, buyers, and
investors. SaaS business valuation is where investors and company owners
determine the financial value of a company.


The SaaS valuation process helps define the company's recent and future
value based on growth and other factors.


How To Value A SaaS Company?


There are mainly three different
types of SaaS valuation used to
value a SaaS company by
considering the company earnings.


€ EBITDA
@ SDE
€ Revenue multiples


Let's dig more about each type of SaaS valuation below.


1.EBITDA


EBITDA, when extended means - Earnings Before Interest, Taxes, Depreciation,
and Amortization. It is a method of measuring the business profitability in net
income.


This valuation method is beneficial for SaaS companies with higher profits.
Hence the EBITDA valuation is usually used for companies with earning power
above $5 million ARR.


How to calculate a SaaS company's EBITDA?


There are two formulas that can be used to calculate EBITDA:


€ EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
@ EBITDA = Operating Income + Depreciation + Amortization


2.SDE
SDE stands for Seller Discretionary Earnings. It is a financial metric that is used


to value SaaS businesses with a single owner or have a value under $5m ARR.


This SDE value is basically the remaining value that is counted after the owner


has paid all their expenses.
How to calculate a SaaS company’s SDE?


SDE = Revenue - Cost of Goods Sold - Operating Expenses + Owner
Compensation


3.Revenue ARR Multiples


This SaaS valuation metric is another great way for figuring out the value of
private SaaS businesses. Here ARR stands for Annual Recurring Revenue.
These ARR multiples are the ratio between ARR and company valuation.


How to calculate a SaaS company’s ARR multiple?


Multiple = Valuation / ARR


Important Metrics For
Saas Company Valuation


What are Saas metrics?


SaaS metrics are used to check and track the performance and growth of
businesses. These metrics allow companies to measure their success and
make relevant adjustments to strategy if needed.


What are some SaaS metrics that every company
should look into?


SaaS companies who want to get a clear idea of their business performance
should consider the below SaaS metrics.


Churn -


Maintaining existing customers is very important in businesses, and the churn
metrics help you measure exactly that.


The customer churn metric calculates the number of subscribers who
canceled their service, either monthly or yearly.


The customer churn metric is one of the most important metrics that help
businesses understand the customer retention rate.


Formula to calculate the Churn rate
(Canceled Customer/ total no. of customers at the start of the year) * 100


The lower the churn rate, the better the customer satisfaction rate.


CAC<V


CAC stands for Customer Acquisition Costs, which shows the amount spent to
acquire new customers and how much value they brought to your business.


CAC is calculated by dividing the total number of sales and marketing spend by
the new customers during the given time period.


LTV stands for Lifetime Value which is the average amount of money paid by
the customer during their engagement with the company.


Both these metrics are important for SaaS companies as they tell you about
the profitability of your business.


The formula to find the ratio between CAC and LTV is LTV - CAC.


For example, if your CAC is 1000 and LTV is 32000, then your business has
good growth prospects.


However, if your CAC is #500 and LTV is 250, then the ratio will be -250,
which means the business is at this time not profitable. In short, the ratio
should be positive.


Recurring Revenue


Recurring revenue means the total number of customers spend on your
service on a continuous basis. This metric is also crucial for SaaS business
models as these businesses offer software on a subscription basis. Knowing
how much customers spend on your business can expect helps businesses
predict their growth over time.


There are mainly two types of Recurring Revenue - Monthly Recurring
Revenue (MRR) and Annual Recurring Revenue (ARR).


MRR help measures the amount of revenue generated in a given month.
And this amount of money, when multiplied by 12, results in the ARR, which
shows the amount of money spent by the customer in a given year.


Best Practices To Increase Your SaaS Value


Improve your customer service
Consistently work to increase customer satisfaction
Invest in customer education


Create frictionless and memorable customer experiences


Recognize your outstanding customers and reward them


To Conclude


It doesn't matter what negotiation table you are on, SaaS valuation is important
for everyone from business owners to investors and buyers.


But to find the true value of a SaaS company, it is crucial to understand every
factor related to the process. And to avoid any errors, it's worth considering
the help of a professional valuer to give you the right idea of the company's
worth.


My Valuation is a trusted business valuation firm in Bangalore, India, offering
true valuation to Indian SaaS companies. We help you provide the best
support and services to handle valuation-related complexities with minimum
errors and maximum accuracy.


So are you ready to value your SaaS company?


Contact us today to get started.


Best Practices To Increase Your SaaS Value | | How To Value A SaaS Company


Important Metrics For Saas Company Valuation | | What are Saas metrics


What is a SaaS Valuation | | What is Saas


Contact Us


Ahmedabad Office
A-916, Ratnakar Nine Square, Opp Asopalav,
Keshavbaugh Cross Roads, Vastrapur,
Ahmedabad - 380015


Bangalore Office


Q B-1104, Mantri Elite, JP Nagar 4th Phase,
Bannerghatta Main Road, Bangalore - 560078


NS +91 9428116623
Wi info@myvaluation.in


es myvaluation.in