š“āā ļø ā”ļøEvery SaaS Founder Needs a POV on Valuation: Practical Methods & 15min Calculator (Operating Concept)
Acquiring and scaling niche Vertical B2B SaaS firms in public š“āā ļøā”ļøāJoin us every Saturday morning for value creation playbooks, operating concepts, acquisition strategies, deal analysis and more..
TABLE OF CONTENTS:
Determine Net Present Value (NPV) to Anchor Your Valuation
Utilize Benchmarks to Establish a RELATIVE Point of View
Blend Methods to Triangulate Your SaaS Businessā Valuation
Getting it Done: A Valuation Calculator & Screen Recorded Overview
šŗ WATCH:
š» LISTEN:
For many SaaS Founders, their business is their most significant asset and represents most of their net worth. By comparison, the average Americanās net worth is largely tied to home equity. Homeowners can quickly estimate their homeās value using tools like Zillow. Private business valuations are much trickier, leaving most SaaS Founders with only a vague idea of their businessā worth.
This needs to change. Founders should have a solid understanding of their businessās value to make smarter financial decisions, seize opportunities, and, ultimately, better manage their most significant asset.
This post covers three practical methods for determining your SaaS businessās value:
Net Present Value (NPV)
Benchmarking Against Comparable Businesses
Blending Methods to Establish a Point of View
Weāll wrap up with a straight forward and actionable Valuation Calculator you can use to establish a point of view in 15min.
Letās get to it!
1. Determine Net Present Value (NPV) to Anchor Your Valuation
Net Present Value sounds like a complex finance topic, but it boils down to understanding what your business is worth today based on future earnings over a defined period of time.
Think of it like valuing a tree based on the fruit it will produce over the next five years.
Future Earnings: Start with how much profit your business is expected to make each year. For example, if your SaaS business generates $500,000 in annual profit for the next five years, those future cash flows are the foundation of your valuation.
Discount Rate: Money in the future is worth less than money today because it can be invested to generate more money, or it might decline in value due to inflation, etc. A discount rate accounts for this. For small private SaaS businesses, a standard discount rate is around 15% because private businesses are riskier than public investments like the S&P 500, which provides a ~7.5% return annually.
NPV Calculation: After applying the discount rate to your future profits, you get the present-day value of those cash flowsāyour Net Present Value.
Example: If your SaaS firm generates $500,000 annually and has a 15% discount rate, your NPV might come out to $4M.
NPV helps establish the āfloorā of your valuationāitās a solid starting point based on the actual cash your business produces.
2. Utilize Benchmarks to Establish a RELATIVE Point of View
Valuation isnāt just about your numbersāitās also about how you stack up against similar SaaS businesses. Buyers compare your performance to others using key metrics like:
Profit Margins: How much of your revenue turns into profit after expenses? A strong profit margin is a sign of efficiency and sustainability.
Growth Rates: Is your Annual Recurring Revenue (ARR) growing fast or slowing down? Faster-growing companies command higher valuations because, in theory, the growth will yield greater profits in the future.
Gross Margins: How much of your revenue is left after the cost of delivering your product? Healthy SaaS gross margins are often above 80%.
Customer Retention: Are your customers sticking around? High retention rates indicate a loyal customer base and stable revenue.
How to Benchmark: Use data from marketplaces like MicroAcquire and Boopos, investment banks like Software Equity Group, or surveys from firms like SaaS Capital (our calculator includes links to solid sources). Look for benchmarks from the closest ācompsā (aka comparaples; firms that look like yours as much as possible).
Buyers are attracted to businesses with above-average metrics, and benchmarking can highlight areas where your business shinesāor needs improvement.
3. Blend Methods to Triangulate Valuation
Once youāve calculated your NPV and benchmarked your performance, itās time to combine everything to estimate your valuation. Hereās how:
Start with NPV: Use your forecasted cash flows and discount rate to get a foundational value.
Apply Multiples: Many SaaS businesses are valued using ARR or EBITDA multiples:
ARR Multiple: Multiply your Annual Recurring Revenue by an industry standard. For example, if your ARR is $1M and the typical multiple is 4, your business is worth $4M.
EBITDA Multiple: This method uses your profit instead of revenue. If your adjusted EBITDA is $500,000 and the industry multiple is 6, your valuation is $3M.
Adjust for Premiums: Buyers often pay a premium (20ā30%) for businesses with strong growth, high margins, or competitive advantages. This increases your valuation beyond the base calculation.
Example Valuation:
NPV: $4M
ARR Multiple: $4.5M
EBITDA Multiple: $5M
Blending these methods might give you a final estimated value of $4.8M. This is a realistic and defensible range that balances cash flow, benchmarks, and market trends.
5. Getting it Done: A Valuation Calculator & Screen Recorded Overview
Click here (or the image above) to access the Valuation Calculator & Screen Recording Overview
Understanding your valuation isnāt just for sellingāitās about staying informed. Whether preparing for an exit, seeking investment, or simply evaluating your businessās health, having a clear idea of your worth puts you in control.
Smarter Decisions: Know when to reinvest, raise funds, or cut costs.
Confident Conversations: Engage with buyers or investors from a position of knowledge.
Optimized Operations: Identify metrics where you are underperforming that will increase valuation.
Even if youāre years away from selling, this exercise can help you assess your business's current value and determine how to boost it over time.
Start now, stay informed, and use this information to make smarter decisions today and in the future.
Hit REPLY and let me know what you found most useful this week (or rock the one-question survey below) ā truly eager to hear from youā¦
And please forward this email to whoever might benefit (or use the link below) š“āā ļø ā”ļø