Whether you created your SaaS product to help solve a problem you had or because you wanted some extra income, the truth is that your SaaS business is a valuable asset.Whether you’re an early-stage founder or you’ve built up an established B2B SaaS business, it's crucial to understand how valuations work and how you can prepare for an exit when the time is right for you.

It’s a Valuable Asset

There are three ways to look at SaaS valuations:<ol><li>Seller discretionary earnings (SDE)</li><li>Earnings before interest, taxes, depreciation, and amortization (EBITDA)</li><li>Monthly recurring revenue (MRR)</li></ol>No matter which formula you use, they boil down to how much money your SaaS business generates and set that number against a multiple that reflects the quality of your business.For SDE and EBITDA, you would set annual profit against an annual multiple; typically, this multiple ranges from 2-10X.MRR is set against a monthly multiple that usually ranges from 25X to 100X.

Valuing SaaS Companies Based on SDE, EBITDA, and MRR

SDE reflects how much money your business makes after all expenses are paid and any salaries are added back into the business. The figure is one way to indicate a business’s earning potential and is often confused with EBITDA. Businesses valued with SDE tend to earn less than $2 million in annual recurring revenue (ARR) and tend to be run by solopreneurs. Year-on-year revenue growth is usually less than 50%.

SDE for Businesses Valued at Less Than $5 Million

Businesses that make over $5 million in ARR will likely use EBITDA, as the business will have a high growth velocity and a more fleshed-out infrastructure. The owners tend to be thought leaders in their industry and operations are developed with department heads and teams working under them. There are usually more stakeholders than the owner. EBITDA takes many factors into consideration, which is why this metric is more suitable for mature and complex businesses.

EBITDA for Businesses Valued Above $5 Million

MRR is a popular way to value SaaS businesses because it’s a key indicator of revenue growth.Investors prefer looking at MRR rather than ARR because annual recurring revenue doesn’t provide proof of churn.Big SaaS brands generating high MRR can raise a lot of money during seed funding rounds, despite not generating profit. For less mature brands that haven’t built up a name, people prefer monthly plans; with a recognizable brand, they can charge a discounted annual plan.A newer startup could be valued using MRR if it’s experiencing rapid growth and ARR is more than $2 million.

MRR for Fast-Growing SaaS Companies

No matter which valuation formula is used, investors look for proof of these three characteristics in a business: <ol><li>Transferability </li><li>Sustainability </li><li>Scalability </li> </ol>

The Three Key Elements of Attractive Assets

Investors look for businesses that can be easily transferred. To prepare your business for a sale, focus on making the transition as seamless as possible. Payment processing can cause huge headaches for buyers if the account can’t be transferred. Payment processing aside, you’ll need to document your business operations as much as possible to make your business plug and play. Creating well-documented code that can be understood by another developer ensures continuity if the new owner wants to develop the product or fix any issues. Standard operating procedures (SOPs) help buyers to learn how to run the business as you did; SOPs are great for training new staff or to refer back to during the transitional period when the business changes hands. While buyers are doing their due diligence, they’ll need to see clean financials. This will include tax returns from the past three years, a balance sheet, income statements, and cash flow.

1. Transferability

Scaling your revenue (MRR) is great, but it needs to be done efficiently.A business with high MRR won’t be worth as much if the churn rate is through the roof and your retention rate is poor. Buyers pay attention to your LTV, churn rate, and conversion rate optimization.Investors will also look at how efficient your operations are at acquiring new leads. Organic lead generation is highly attractive because there are no expenses involved; if you have other customer acquisition channels (CACs), the conversion rates will indicate whether these marketing channels are worth maintaining.

2. Sustainability

The most exciting prospect of SaaS businesses is their room for growth.Buyers will be looking at how scalable your business is based on a number of factors, such as the LTV/CAC ratio.A low LTV/CAC ratio may indicate that more capital is needed than expected to scale a business; on the other hand, a high ratio could mean your growth is slower than your competitors because you aren’t spending enough on marketing.

3. Scalability

<ul><li>Competition  - is there enough differentiation from existing software companies? </li><li>Product lifecycle - does your product need any major updates to stay relevant? </li><li>Technical knowledge - does the new owner require deep technical programming knowledge to be able to run the business, or can that knowledge be easily transferred? </li><li>CAC per channel - how effective is your marketing strategy at generating new customers in a cost-effective way? </li><li>Diversification - how many single points of failure are there in your business? </li><li>Saturation - is there room for growth in the current market? </li> </ul>

Other Factors That Affect the Sales Multiple

If you're thinking an exit strategy from your SaaS startup, you have to be prepared for it.

Whether you created your SaaS product to help solve a problem you had or because you wanted some extra income, the truth is that your SaaS business is a Here is an article on what investors look for in SaaS businesses and the factors that affect multiple sales.

Mine

Here's What Buyers Look for in SaaS Businesses

70% of companies say it’s cheaper to retain a customer than acquire a new one. The old rule of thumb says it costs 5 times more to acquire a new customer than it did to retain one. Engaged consumers buy 90% more frequently, spend 60% more per transaction, and are five times more likely to indicate it is the only brand they would purchase in the future. Doing the right thing at the right time can help retain customers.

Why is customer retention important?

Ask yourself these questions. Do you know the reason why your customer is canceling? Is this a surprise for you or do you already know the issue? Can the issue be solved? Look deeper why weren’t you able to get in front of the issue earlier, what attempts to solve have you already made (because there is no use trying those again), and consider what you haven’t already tried.

Analyze what you know.

Collect the voice of the customers at risk. This will help you be aware of many important things including the reason your customer bought your product, why they stuck around, and what made them cancel. The following methods and campaigns can be used to learn more about your customers:<ul><li>Social listening</li><li>Surveys</li><li><a href="https://customersuccessbox.com/blog/net-promoter-score-nps-in-customer-success-and-its-relevancy/" target="_self">Net Promoter Scores</a></li><li>Support tickets</li><li>Interviews</li></ul>

Gain an Understanding of What Customers Want

Set up a workflow to determine which triggers to use based on the churn risk factors you’ve identified. For SaaS providers, you might look for customers that haven’t logged into their account for X number of days, didn’t complete the onboarding, or have stopped using your product. Do your clients avoid answering your calls and your emails? Do they cancel their meetings with you or your reps? This might be a sign their emotional attachment is decreasing on par with their satisfaction.

Build Workflows Around Your Customer Churn Red Flags

Churn is inevitable. But you need to analyze the real reason for the churn which helps you build up solutions against it. Use your churned customers’ feedback to avoid mistakes if any. Also if a customer is not satisfied with your product. Don’t let that customer walk out the door before you know why. The feedback here is very valuable for you.

Talk to the customers who are leaving

If you know you can’t solve it, or if the customer isn’t worth saving, you should probably move on. Ask yourself this question, Is this customer worth all the effort you are taking to save them? It is obvious that you cannot solve every cancellation reason? Maybe sometimes it’s not enough to just have a great product that solves a real problem. Or your customers have low adoption on their side and cannot use your product to the fullest.

Move on when the time comes

Every good customer is worth an all-out effort to retain them. This article talks about ways to retain customers before they cancel your subscription.

Stashed ideas

How To Retain Customers Who Are On The Brink Of Churning

Aha moment is when a new user first realizes the meaningful value in your product. This moment <a class="idea-content-link" href="https://productled.com/training/">turns users into happy, paying customers</a>.

Three things happen when you (or a user) "feels" an aha moment:<ol><li>You understand exactly how a product can help you.</li><li>You experience the core value of a product.</li><li>You’ve achieved something very quickly that might have taken you hours previously.</li></ol>What aha moments look like in real life, for real companies.<ul><li>For <a class="idea-content-link" href="https://www.airbnb.com/">Airbnb</a>, it's making your first booking.</li><li>For <a class="idea-content-link" href="https://www.google.com/">Google</a>, it's finding an answer to something complex.</li><li>For <a class="idea-content-link" href="https://www.facebook.com/">Facebook</a>, it's connecting with your friends.</li></ul>

What does an aha moment feel like?

They are the ones who become amazing at whatever it is that your product enables them to do. Your mission when speaking to such users is to identify what a success story looks like for this type of user. The easiest way to contact them is via email. Also, talk to your churned users to identify the value gap (discrepancy between what a customer expects from the product and the value received or perceived) The gap could be due to the customer not understanding the product’s capabilities or how to use it, negative mental or emotive response to the product, or friction.

Talk to Power users

Look at the customer behavior of both your good and bad customers. Doing this will help you to identify <a class="idea-content-link" href="https://productled.com/blog/how-to-build-a-user-journey-map/">successful user journeys</a>. Follow the 5-step process<ol><li>Put a list together of all your product's features.</li><li>Pick a list of your most successful customers and analyze what features they used early on, continue to use regularly, and stopped/didn't use.</li><li>Write down what features got adapted and didn't.</li><li>You need to find the behaviors that, when performed, best correlate with continuing to use your product for an extended period of time.</li><li>You want to lead with the features that get people to upgrade.</li></ol>

Look for patterns

Here are a few to get you started…<ul><li>Using a specific set of features.</li><li>Achieving a particular outcome within a product.</li><li>Using your value metrics.</li><li>Using the product several times in the first week.</li><li>Watching an onboarding video before diving into the product. etc</li></ul>Prioritize experiments and keep track of them. Organize your potential experiments to test in an Experiment Log.

Shortlist and test potential behaviors

The aha moment is when the user realizes the value of a product. This is a complete guide on how to identify your aha moment, with examples from top companies like Slack, Zoom and Airbnb.

How to Identify Your Product's Aha Moment

There are many free tools and resources that can get your new brand looking professional. This is my recommended list. I will update as I discover better tools.

How can new start-ups leverage technology?

Emails are so important, especially in B2B. Make sure you look like a real person with a real company the next time you cold email a prospect. It will make a difference. If you want a step-by-step guide on how to make a free one using <a href="https://signaturehound.com/">signature hound</a>, visit my article: <a href="https://www.evolvbam.com/post/create-an-email-signature">Create an Email Signature</a>.

Get a Great Looking Email Signature.

Every business needs to attempt to create a worthwhile brand. It doesn't always mean hiring expensive branding agencies and creating elaborate experiences. Looking legit can be affordable. 

A Creative Director's Guide

The Start-Up's Guide to Affordable, Professional Branding.

BAT is a token on the Brave browser that was built on top of the Ethereum token.Users with the brave browser have their interactions with digital ads stored on a blockchain ledger. From this information, BAT tokens are distributed to users and publishers on behalf of the marketing budget of the business. This allows for the right content to be served to users at the right time drastically increasing ad ROI. Publishers can also receive BAT tokens from users who find their content worthwhile. People's attention is more important than ever. Brave pays users for it. Read more about <a href="https://www.evolvbam.com/post/the-future-of-small-business-advertising">Brave.</a>

BASIC ATTENTION TOKEN & BRAVE BROWSER

It's important to constantly be keeping up to date with what the future of advertising beholds. This is my compilation of new SAAS companies, new advertising tactics, & marketing strategies. 

Here's What Buyers Look for in SaaS Businesses

How To Retain Customers Who Are On The Brink Of Churning

How to Identify Your Product's Aha Moment

The Start-Up's Guide to Affordable, Professional Branding.

The future of Advertising

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