5 Simple (But Important) Metrics To Remember For A SaaS Valuation
If you’re a CEO or CFO of a SaaS business that needs to develop and grow, acquire another company, or prepare your business for a trade sale, then getting a valuation of your SaaS business to achieve your business goals can be challenging.
If that’s your situation, then giving lenders, investors and buyers a measure of your strength, stability and growth with these tried and tested metrics may be just what you need.
Before we get into that, you should know to attract lenders, investors and buyers to the potential of your business, you need to answer their questions about risk and return.
And another thing. Lenders, investors and buyers calculate your SaaS company’s worth based on the current value of your future cash flows.
With this in mind, the metrics I’m going to share with you answer their questions, because they demonstrate your predictable, recurring revenue as well as steady and incremental growth.
Let’s get started.
As a SaaS business, your subscription-based model is typically built around receipt of recurring revenue.
As such, lenders investors and advisors know you expect revenue realisation to take place over the lifetime of your customers, and therefore, your profits to expand significantly over time.
For this reason, when valuing a SaaS business, they tend to use Annual Recurring Revenue (ARR) to get a grip on monies received every year for the life of a subscription (or contract).
Of these include:
Predictability is the name of the game when it comes to assessing your long term viability.
Your SaaS business model costs are front-ended. So when assessing risk and return, lenders, investors and advisors want to know if your SaaS business delivers a valuable and sustainable service. More importantly, you won’t lose customers.
To measure sustainability, they look at SaaS business’s year-over-year and month-over-month growth. In particular, the metrics they’ll want to see include:
- Lead generation
- Customer engagement
- Customer and revenue churn
Next, lenders, investors and potential buyers want to know how efficient your SaaS business is at converting capital into new customers. Also, how much money you need to achieve your business goals. Because of this, they want to see and understand your:
- Go to market strategy
- Customer acquisition channels
- Sales efficiency metrics
- Customer acquisition cost (CAC)
- Customer Lifetime Value (CLV)
- How much capital you consume to grow ARR
In addition to that, your TAM (the total size of your addressable market) gives lenders, investors and potential buyers a metric to understand their revenue opportunity. And of course, perceived risk.
To understand your TAM, you need to:
- Demonstrate your market’s potential for growth
- Identify the competition
- Be clear about barriers to entry
- Show the potential for product upgrades, upsells and pricing optimisation
- Ability to transfer ownership and exit
Beyond that, it’s a good idea to maximise the value of your <exit plan><Link to exit plan blog>. You see, SaaS companies that can demonstrate a long term strategy, including contingency plans, show how they’re a risk worth taking, and thus their value increases.
To sum up
Demonstrating predictable, recurring revenue, as well as steady and incremental growth, is key to getting a SaaS valuation that’ll attract lenders, investors and advisors.
Of course, the best way to get an idea of how much your SaaS business is worth is to speak to a specialist broker.
You see, a specialist broker will be able to calculate your annual rate of return (ARR) and advise on applicable growth levers, based on its assessment of your business and previous transactions.
I’m ready. Are you?
If you’d like advice about getting a valuation of your SaaS business, drop me a line, and we’ll set up a time to chat.