One question I often get asked by my subscribers (especially sellers) is: how do you value a micro-SaaS business? Valuing a micro-SaaS startup isn’t so different from finding the valuation of a SaaS startup. However, there are subtle differences as we’ll observe in this article.
The calculation may be a bit tricky, but I’ve explained it in detail based on my experience overseeing multiple acquisitions. Whether you’re looking to sell your micro-startup or not, you’ll also learn how to find your micro-SaaS multiple so you can exit your business for a deserving amount.
So without further ado, let’s dive in.
As with valuing SaaS startups, there are three main ways for finding out a micro-SaaS company’s worth based on its earnings – SDE, EBITDA, and revenue. These valuation methods take your business’s profitability and maturity into consideration. Real quick, the best valuation method for your micro-SaaS startup may be the SDE model as it’s more suitable for small software companies with little to no management team unlike EBITDA for much larger companies.
Before we dive deeper into these methods, let’s first take a look at some of the common terms we’ll come across in this article;
SDE (short form for Seller Discretionary Earnings) is the remaining value of a business or the profit the owner makes after deducting the Cost of Goods Sold (COGS) – the expenses include payroll, software, rent, etc., but doesn’t factor in the owner’s wages – this can be added to the profit.
A simple formula for calculating this is;
SDE = (Revenue + Owner Compensation) – (Cost of Goods Sold + Operating Expenses)
Basically, this valuation model is used for calculating the value of software businesses valued at under $5,000,000. So the best method for valuing the small software businesses on our platform is the SDE valuation method since the listings are micro startups valued at under $100,000.
EBITDA means earnings before interest, taxes, depreciation, and amortization, and this factors in the owner’s wages. Just like expenses are added to SDE, EBITDA adds interest, taxes, depreciation, and amortization into the income.
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
EBITDA is used to measure a company’s financial performance/profitability to determine the strength of its cash flow. Unlike SDE, it’s used to value companies earning over $5 million as it considers more factors.
When valuing micro-SaaS startups, SDE and EBITDA may not be enough metrics to measure their worth as most of the upfront investment goes into growth, and may make the business seem unprofitable. However, micro-SaaS businesses make money through the ARR (annual recurring revenue) model – more on this in a bit. With this model and customer retention, the company’s profit can improve with time despite spending a lot on marketing and growth.
While the revenue model is good for small businesses, the idea of valuation is based on growth, so if your micro-SaaS isn’t growing, buyers may not be willing to pay an acceptable price for it.
Now we know the different valuation methods, we have to find the multiple which will give us our listing price.
Listing price = annual net profit x multiple
Real quick, here’s a general overview of how we evaluate micro-startups;
While companies can be valued at 3x to 15x their annual revenue, getting the multiple is not as straightforward as outlined above. The multiple reflects the long-term value of a startup, and it can be gotten based on some factors. Let’s explore them.
There are a lot of metrics micro-SaaS buyers look out for when assessing the value of a micro-SaaS startup. Here are some of the most important ones;
Churn is a measure of the percentage of customers that canceled their subscriptions. It can either be calculated monthly or yearly, but it’s usually done yearly. This is one of the most important metrics buyers look out for when acquiring a micro-SaaS as it can be used to predict a company’s revenue month over month and its profitability.
Churn rate = (Canceled customers / total customers at the beginning of the year) x 100
The lower the churn rate, the better as it indicates customer satisfaction and loyalty.
For a micro-SaaS, your target should be less than 30%; however, if you run a self-serve micro-SaaS (self-service micro-SaaS business model is where customers can troubleshoot problems by themselves rather than having salespeople educate them), it could get up to 60%.
Customer acquisition cost is the marketing and sales cost of getting a new customer while lifetime value is the amount of revenue you can expect to make per customer. Both metrics are bigger indicators of a business’s profitability.
CAC = (marketing cost + sales cost) ÷ number of customers
You should look at making your CAC as low as possible while your LTV should be as high as it can get as it indicates your micro-startup has got good growth potential and is sustainable. But if the reverse is the case, your business isn’t profitable.
To measure its profitability, we need to get the LTV/CAC ratio by dividing the LTV value by the CAC value.
Let's say your LTV is $1,000 while your CAC is $500. That gives us;
Ratio = LTV / CAC = 1000 / 500 = 2
A good score to aim for is 3 as it shows that your startup is making profit and growing while being in a safe place should your CAC rise.
MRR or monthly recurring revenue is the revenue your SaaS brings in repeatedly per month while ARR or annual recurring revenue does this over a year.
While ARR gives a big-picture display of your micro-startup’s health, buyers are more interested in MRR as it’s more predictable. You stand a chance of getting a better deal when you focus on increasing your MRR over your ARR.
In getting your business’ multiple and valuation, you may want to consider these secondary factors.
The reason your involvement in the business is important is that 30% of the buyers on our marketplace are non-technical buyers. As a micro-SaaS founder, you’re most likely in charge of the startup’s marketing, customer service, content, and maybe design and programming. If you’re heavily involved in your business this way, this may put off some buyers as they've got no programming skills and don’t wish to take all these tasks upon themselves. They’ll prefer to have other hands on the team that are familiar with running the business to help with running it - this is why we always ask startup founders to support buyers for 1 month.
To make your startup more attractive for acquisition, set up a system where the business can run with little to none of your input. While your involvement doesn’t determine the value of your business, it could limit buyer interest if you’re heavily involved.
Buyers are mostly interested in businesses that have grown at a rate of 10 to 20% within the past 1 year.
The customer acquisition channel is very important as it’s what drives growth. Some of them include search engine optimization (SEO), organic content marketing, LinkedIn ads, Facebook ads, affiliate programs, etc. Organic content and SEO are some of the top channels micro-SaaS founders use. Buyers seek to know how established and profitable these methods are as well as the least profitable methods.
When buyers are assessing the value of your company, they consider three metrics: users that upgrade after using the free trial/freemium service, paid membership, and a combination of both. A channel such as LinkedIn or SEO may be unprofitable for you but profitable in the hands of an expert LinkedIn marketer or SEO specialist.
What growth plans are on the horizon? Have you got plans to release a new product to reach new customers or appeal to existing ones? Are there chances to improve upon the existing product or acquisition channel? These factors can impact the value of your micro-SaaS multiplier.
It’s most likely you’re not doing business in a niche where you’re the sole player. If you’re competing alongside competitors that are adequately funded, you may have a hard time gaining traction, and this can affect the value of your business. Buyers will be interested in knowing the advantages you’ve got over competitors to ensure the business keeps thriving after it's bought.
This can affect your micro-SaaS startup’s valuation as buyers may not be interested in a startup playing in a saturated market. However, if you can show that you’re doing something impressive to get customers either through organic or paid traffic, buyers may give your business a solid chance even when you’re competing with VC-backed startups.
A business’ age affects its valuation as buyers tend to prefer micro-SaaS startups that are a minimum of 2 years old. However, it isn’t a big factor as a micro-SaaS doesn’t need to get up to 2 years or more before proving to be a product-market fit.
After knowing your startup’s valuation, it’s time to list your business on our marketplace - it’s free - there are lots of interested buyers. And if you’re interested in getting profitable micro-startups, sign up and we’ll send you a weekly list of new businesses for sale.
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