Jul 21, 2020
On this episode of Quiet Light, David Newell talks about when a
SaaS business earns a revenue-based multiplier. David is one of our
colleagues who just wrote a guide outlining everything he knows
about SaaS valuations. Tune in to hear his thoughts on how SaaS
businesses have unique needs, the ideal scenario for revenue
growth, and which valuation metrics to use when scaling.
Topics:
- Revenue-based multipliers.
- What happens when SaaS businesses scale.
- The ideal scenario for revenue growth.
- SaaS valuation metrics.
- Why there is a bias towards monthly plan revenue.
- Comparing scaling a business to dating.
- Takeaways from David’s guide.
Transcription: Joe: I understand
you spoke with our colleague David Newell about when a SaaS
business becomes a listed at a multiple of revenue instead of
multiple of discretion earnings, how'd that go?
Mark: Well, there's an interesting dynamic when it
comes to SaaS businesses, right? E-commerce is pretty
straightforward. We have some pretty good metrics that just show
that vast majority of e-commerce businesses will be measured as a
multiple of their SDE but SaaS businesses, especially on larger
levels, we see transactions happen as a multiple of revenue even in
some cases when you have a business that is not turning a profit or
is currently EBIDTA zero or close to it. And so there's a big
question out there, what are the criteria that allow you to apply a
revenue multiplier versus an SDE multiplier to a SaaS business?
Obviously, this makes a huge difference, right? I mean, if you're
multiplying your revenue by five, that's going to be a much bigger
number than multiply SDE by five, or four, or three, or whatever.
So SaaS valuations can accelerate incredibly rapidly. I mean, it's
breakneck sort of whiplash valuations that happen. So I talked to
David; I sat down with David. He had just finished writing a
15,000-word guide that really picks apart everything he knows in
SaaS valuations and that's a lot that he knows. And he goes into
how do we first make this determination between a revenue-based
multiplier versus an SDE multiplier? And then the second question,
which is again equally sort of murky if you haven't been doing this
as long as David has, is where do you then find the multiplier
because the ranges are a bit broader than we see in other sectors.
And so he goes over the approach he takes for it and then we
started talking about some of the individual metrics as well, which
are going to apply to all SaaS companies whether it be revenue
based multiplier or SDE multiplier. If you are a geek when it comes
to valuation talking this is the podcast for you. It's definitely
meaty. We get into it pretty in-depth on this. But if you really
enjoy this, take a look check out the guide that he wrote. It's now
published. It's going to be available on our website. It’s also
available for PDF download. Share it. Discuss it. Reach out to
David. Chris Guthrie would be another great person on our team to
discuss these items with. He knows SaaS extremely well. And
frankly, anybody on the team, we've all worked in this space
ourselves but really, when it comes to our resident expert, we look
to David first and foremost and part of it is because of the guide
that he put together here.
Joe: Let's go to it.
Mark: Hey, David, thanks for coming on the
podcast. I know you've done a couple of these before, right?
David: I have, yeah.
Mark: Well,
cool. I’m glad to have you back on and I'm excited to have you on
this week because you finally finished, and I shouldn't say finally
because it wasn't even expected of you but you put together a very
comprehensive guide on valuing a SaaS company. How long is it?
David: It's a jargon. I think it's about 15,000
words. We shouldn't say that just in case that thwarts people from
reading it. I think we're going to do a distilled down version of
it.
Mark: It's kind of like a mystery novel, how
to value a SaaS guide. You know I wrote the ultimate guide to
website value years ago when that was what we were really talking
about is valuing websites and I think that was a 25,000-word guide.
I started out thinking this should be something I can hammer out in
a week and it turned out to not be a week. It was much longer than
that. It took a while to put that together. And I know this took me
a while to put together but the stuff in here is really an
authoritative guide on the valuation principles behind a SaaS
company.
David: Yeah, it's a strange terrain this
SaaS valuation conversation because unlike other business models
that everybody's familiar with is not purely an earnings-driven
model. It's not all about seller’s discretionary earnings. And you
see that so much in kind of public markets, they speak about SaaS
businesses based on revenue multiples and then obviously in our
kind of business brokerage landscape, you see it more around SDE
multiples and so there’s this kind of big confusion in this cross
terrain between both buyers and sellers about what is my SaaS
business worth and on the other side of the table is how much
should I pay for it. And so there's a surprising amount of
similarities in the valuation logic between both but what I wanted
to point out was the crucial distinctions between them and why
they’re there to really help people understand that both buying and
selling.
Mark: Yeah, and I think this is an
interesting conversation because we talk so much about valuations
at Quiet Light Brokerage. And I've said in the course I put
together on how to sell an online business for six, seven, or
eight-figures I spent a lot of time on the valuation side and
trying to dispel the myth that the valuation formula creates the
value of the company as opposed to the valuation approaches and
formulas and methodologies are really a predictive exercise more
than anything else. And that really, when you boil it down into
kind of a philosophical standpoint, it's really a measurement of
expected return on investment for the buyer discounted by risk or
mitigated by risk. And so you can have other valuation approaches
that are completely valid. I know in the web hosting space, which
is where I cut my teeth in the brokerage world, that was a
revenue-based multiplier as well, because you had a lot of
strategic sort of sales going on. It was typically 10 to 16 months
of revenue was the average range that we were seeing so I’m
interested to get into this. Because I know when I talked generally
to people about valuations, I always have this asterisk of but SaaS
companies are different and it's kind of a mystery box. So let's
talk a little bit about that right there. We'll start with the
revenue-based multipliers. Why are we using revenue with SaaS
companies and are all SaaS companies going to be valued on their
revenues as opposed to SDE?
David: Yeah, that's a
great question. You hit the nail on the head with what you said
there which is that it comes all down to expected return on the
asset. And I think the way to think about it is actually kind of in
the life cycle of starting a SaaS business. If you imagine starting
as many you do people SaaS businesses out of their bedroom; a lot
of entrepreneurs see a problem, decide they didn’t like it, wants
to code a solution to it, put in their own money into it, then they
might bring in a developer to start helping them out and they start
putting their own money into start scaling it. They get friends as
customers and sooner or later they are 10,000 in MRR or so forth
and then they start to scale a little bit beyond that. And so
initially you're in this period of scaling often with your own
capital. And this is kind of a lot of the businesses that we see in
the very early stages; kind of like homemades, bootstraps, sub
million dollars in ARR businesses. They can remain focused for a
large part on earnings and that's why they get they tend to craft
some seller’s discretionary earnings-based valuations. A lot of
these SaaS businesses, for example, one doing 300,000 ARR might
have about a hundred thousand in seller discretionary, slightly
more multiple of that. Now, what happens? Typically a SaaS
businesses look to scale particularly as they kind of arrive more
towards a million in ARR and above is that typically what's the
case is quite a lot more infrastructure is needed to be brought in
to solve the biggest challenges of SaaS businesses which is churn.
And that infrastructure is a lot of sort of customer success, it's
a lot of additional development in terms of creating better
onboarding, and it's putting a lot more sort of infrastructure
around the business to really mature and allow it to scale from a
small business into a much, much, much larger one, which can happen
very quickly, arguably faster than any other business model. And so
what happens it seems to me has been the case is that it has become
acceptable and standard within the SaaS establishment to at this
kind of sub million and arriving at a million in ARR level be able
to say we're going to sacrifice our earnings in the near-term, in
the short term in order to now chase absolute scalability in the
business. And this is acceptable, more so in SaaS than any other
kind of business, largely because we have a recurring revenue model
with unit economics that are stable once you have churn in place
that allow you to do that race up and scale and then cut back on
that expense and immediately just be accruing very, very, very
significant profitability in the business. And so the quid pro quo
for you, reducing profitability of what was a relatively profitable
small SaaS business to a now significantly unprofitable or flat
profit business is that you'd have to start chasing revenue growth
significantly. And so to your point, Mark, about having this kind
of expected rate of return, buyers basically say we'll let you run
to EBITDA or EBIDTA 5% margins in order that you're going to start
sharing consistently 40% to 50% to 60% year over year growth or
higher while still going between a million in ARR to five million
in ARR, to 10 million in ARR, and 20 million in ARR and beyond. And
so that is really the thinking behind why you get to a
revenue-based multiple with businesses because the expectation is
that eventually a SaaS business will mature and become extremely
profitable. A great example of that is something like Salesforce
which is now striking off enormous amounts of cash but for a long
period of time before it wasn’t. And so a lot of the businesses
that you see come to market eventually even IPO still have this
same kind of fundamentals and eventually, their hope is that they
do become very profitable businesses. So it all kind of descends
really back from that and I think that some of the question marks
around valuation methodology is where is in this kind of hundred
thousand in ARR to three million in ARR level which is, of course,
where we do a lot of business and where a lot of other market
participants are; people listening to this looking to buy and to
sell often are is figuring out where are you in a lifecycle, the
life journey of the SaaS business, like what is your aim and what
are you trying to achieve? And that really informs what the
valuation method is for the business.
Mark: So as
you said there, and there's a lot in there to unpack but the
tradeoff or the requirement if you're going to be running at a low
EBIDTA or a low profitability or even zero profitability, and I
have seen this, by the way, we get these messages from private
equity all the time saying we are actively seeking out X, Y, and Z
with these characteristics. And I've talked to private equity that
is looking for SaaS companies where they said we are not concerned
about the EBITDA, we're not concerned about the profitability, but
the expectation there is revenue growth at that. I would imagine,
though, that there's got to be some other elements in there as well
that; let me back up a little bit, we have the revenue growth, but
I'd mentioned the expense structure needs to also look at this as
being a growth-driven company where the expenses are being driven
mainly towards growth. I can't imagine a scenario where you
wouldn't necessarily see that but what happens if the growth is
minor? So you have a company who is maybe a 500k ARR and they're
growing and they're trying. So they're investing heavily in
advertising, but their cost of acquisition has skyrocketed. Or
they've invested in a large sales team to do onboarding, but they
just have not figured that out yet. At what point can we start to
say it's not working or is that a solution or somebody just needs
to wait in order to sell the company, how do we start to make that
discernment in that kind of squishy middle territory where we don't
have the clear revenue growth, but we still have the low EBITA?
David: 100%. That's what we call the struggle and
there's a lot of SaaS businesses in that exact pocket. And the
decision for the management team really is what do we do to grow or
do we park this and move on to something else? And the former can
involve all kinds of different decisions. Obviously making pivots
within the business, like changing terms of software products,
customer base, also looking to kind of raised capital, the venture
capital or angel just to try and get into different channels or
find capital to source it from there. And you more or less, Mark,
have to push towards that fabled grace, because that's the only
available kind of exit option to you from there. Or you go the
other way, which is; and you see there is a lot of businesses we’re
promising and then they haven’t reached the cap in the market or a
competitor outcompetes them or management loses interest or
whatever, and they start to trail off, go flat, and you end up with
what's called zombie SaaS which is a not particularly affectionate
side while it’s probably still a lovely business. And then the
option there is more or less you have to cut back all of that
operating expenditure in the business in order to restore some
earnings and try and exit at typically a much lower multiple of
revenue still, but considerably lower that looks more like a normal
of an EBITDA type sale and just cut your strings basically and move
on to the next thing. And so many businesses, of course, we all
know how hard it is to grow and scale any kind of business are in
that struggle and trying to figure out that option.
Mark: Yeah, I love going through with people the
basic framework that we created of the four pillars of value. You
want to mitigate your risk, you want to have good growth, make it
easily transferable, and have great documentation. Well, that's
second pillar of growth is so easy for us to say, right? You want
to have great growth and everyone's thinking, well, yeah, of
course, I do. It's a lot harder to do. Let's talk about the ideal
scenario here. You have a company that is growing strongly and
let's say that you're in that one to three million ARR range and
we're seeing that ARR grow rapidly so we can apply a multiple to
the revenue here. I know what people are thinking, what sort of
multiples can we apply to them?
David: Yeah, so
this is when we flip into a slightly different structure but with
very similar dynamics to how we think about business value at Quiet
Light and the way we model multiples but the difference, the
departure is the starting point. So whereas we in the private buyer
side particularly the earnings businesses, we draw upon the several
hundred previous transactions we have. We know where the average
multiples are for businesses with certain characteristics in nature
and we can call on that data set. To start with the revenue
multiples side of things you have to again go find the data set and
the data set to pull on is generally the public market. And so the
best thing to do to start with is actually go look at like an index
of cloud companies; SaaS companies that are publicly traded on
Nasdaq and so forth, and use that as the benchmark for that kind of
revenue multiple that normal publicly traded SaaS businesses are
trading at. And that could be something like 10 times, 11 times
forward multiple around probably what it is right now. And then, of
course, naturally, that's a multiple that's appropriate for a large
publicly listed company so already you're saying like, well, that's
not really relevant to my smaller private business. So the first
thing you have to do is make a public to private discount on that
and so there are varying schools of thoughts around what that kind
of discount is. It can be somewhat arbitrary. There's a lot of
private equity companies out there that speak about what they do,
and they have portfolios of private companies that they pour. The
received wisdom is it's anywhere between 25% to 30% immediate
haircut for being a private company. So you can come down off that
11 to something like eight, for example, and you have what feels
like a large private company SaaS business should be trading at.
And then we get more into the territory of what we do Quiet Light
and what you're just talking about, Mark, in terms of the different
four pillars of the business and you start to adjust based upon
where this business is aware of the SaaS business we're talking
about is relatively strong or weak compared to businesses of its
size and businesses of its nature. So three million in ARR is a
great example, you'd actually expect on average businesses at that
level and this kind of valuation exercise to be growing probably at
something like 50% to 60% year over year because it gets harder and
harder to grow faster and faster, obviously, with scale. And so if
it was much larger, say like a hundred million, you'd actually
reduce it and say the average business at a hundred million ARR
would be growing at about 30% year over year. And so already you
need to compare what's the revenue growth rate of this business
versus the paired average for other similar-sized businesses. And
it's again a case of going through all of these different classic
criteria that we normally do; revenue growth, churn, lifetime
value, diversification, all of this classic operational metrics
that go back in kind of normal business logic land and just
comparing where does it look like versus businesses of its size and
businesses in its same kind of customer segment of category and
that begins the adjustment process down until you get to a multiple
and that starts to make sense.
Mark: Yeah, so I
want to touch real quick on just the size of a business in general
because I know we experience this across the board with all
different types of businesses. And yeah, my alarm bells went off,
and let’s just start with the publicly traded companies. Because I
can hear all of my e-commerce clients saying, well, fantastic; I
don't know what Amazon is trading at right now as a multiple of
revenue, but I'm sure it's a ridiculous number.
David: Yes.
Mark: But Amazon is
also the largest company in America at this point. Actually, I
don't know that for sure. I'm sure they're up there, though.
They're top five. So sort of with the publicly traded markets is a
starting point but there's a lot of discussions that are going to
happen in place. So if we're looking at a publicly-traded company
like a Salesforce, as we scale down in terms of revenue down into
the seven-figure territory from the nine-figure, eight-figure,
seven-figure, the discounts do come in pretty rapidly. Why is it
that larger companies earn a higher multiple of either revenue or
earnings, in your opinion?
David: Well, there's a
perception of greater stability with greater size. Additionally,
just generally speaking if you were to say a business growing 30%
year over year at a hundred million in ARR versus one at 10 million
in ARR it’s more oppressive to be doing a more valuable; you're
creating more value at a hundred million than you are at 10 million
and therefore, it's commensurate with so the business is worth a
greater multiple. It's much, much, much harder to do so. And you
see that very, very clearly if you just go and look at a
size-adjusted scale in public markets, at businesses at scale that
are growing very quickly, they're the ones that are trading at the
highest value and that's why Amazon's ballistic valuation. But it's
because it's delivering unbelievable revenue growth for business
scale. It's already absolutely huge in size so it is very, very,
very impressive. But you're right, you need to start discounting
down quite significantly. But it's tempting to be like we're
starting so kind of pie in the sky with these public numbers and
public multiples like wipe off of there. They are the heartbeat of
overall like macro SaaS macro sentiment and like it or not, that is
where a lot of sentiment; investment sentiment, think about it like
kind of customer confidence. It's kind of like investor confidence
really does benchmark from public market tech valuations.
Mark: I mean, it makes sense, right? Everything
that we're talking about here, any sort of valuation is really a
market-based valuation. Anytime we're valuing any asset, whether it
be a business or apples, it's based off of market dynamics here. So
that part makes sense. I want to dig into the business metrics
though that we start to get into in more. The regular as we are
characterizing it, the regular valuation metrics that we look at.
Within the SaaS world, these are going to be somewhat different
anyway from, say, an e-commerce business, right? On an e-commerce
business, we're going to be looking at gross profit margins, we're
looking at growth, we're taking a look at some qualitative aspects
of the products that they're selling such as the intellectual
property protections and everything else. What sort of business
metrics are we going to look at for a SaaS company, regardless of
whether we're looking at it from an SDE valuation viewpoint or a
revenue multiplier viewpoint; what are some of the other metrics we
want to look at?
David: Yeah, it's a great
question because it’s both actually identical and this is where the
commonalities between the two methods are huge which is that it's
all very well talking about in a revenue growth way of SaaS
businesses but you have to look at what's the quality of that
growth. And the key barometer of quality of revenue growth in any
SaaS business is churn, average revenue per user, lifetime value, a
monthly versus annual plan split, and the gross margins on there.
So clearly if you just take the first one, because churn is such a
focal point for everybody, if you have a business with an outsized
level of churn versus its size and category, then that's a major
red flag in terms of the business. You see that quite a lot in
terms of Shopify or Amazon plugin type add-ons, where largely
because of the type of end-user which on Amazon can turn over quite
quickly buyers and sellers come and go there. Those tools can kind
of have quite high churn rates. And so it's an interesting one
because they often have very fast growth rates in general, like a
very sharp revenue growth rate because Amazon is an absolutely
enormous space to be in. There's tons of new sellers turning up,
signing up for new tools that they’re churning away after three to
four months. So you have to immediately look at can I appraise this
tool that's going 100% year over year growth versus the 15% monthly
churn? Because if it stops growing even just a little bit within 12
months, it's going to churn out almost the entire customer base and
cut off all the growth. And so you have to look at those two.
They're absolutely symbiotic. And it's the same with seller’s
discretionary earnings type businesses because ultimately that
impacts the bottom line as it is with revenue multiple. And then
the interesting one is looking at monthly versus annual plan split.
Naturally, most SaaS businesses are an amalgamation of both and
it's definitely favored and preferred that there's a much stronger
bias towards monthly planned revenue if that makes up sort of 85%
plus of your overall business. That's perceived as a very good
thing. If annual is a bigger proportion of that, that's something
of a concern. And that's really just because what you want in SaaS
is predictability. That's what everybody loves with recurring
revenue. Monthly plan revenue is more predictable than annual
planned revenue, which seems psychologically counterintuitive, but
it's not when you consider that every single month customers have
the opportunity to churn away, whereas with annual planned revenue
that only happens once every 12 months. So you have no idea what's
going to happen in 12 months’ time to a large cohort of any bias.
Their whole lives could have changed quite a lot so the data set
there is less rich and so it makes it more opaque for bias. And so
they actually value that pop business generally lower than monthly
occurring revenue. So they are just a few of a couple of the kind
of revenue quality metrics that should be really important for both
buyers and sellers.
Mark: I want to talk about ARP
but before that, I'm going to talk about churn and a concept of it.
I don't know if you would take this into account an evaluation of
an Amazon SaaS business, for example, that is supporting sellers.
As you know, David, I have an interest in a dating website online
and there's a concept in dating world called the good churn. It's
somebody canceling their account because they met somebody. And
within the dating world, you want to have good churn even though it
does impede growth. I know with the site that I have interest in,
the business I'm interested in, we have monthly turnover on 23%,
which is massively huge and it does impede growth, but we want to
have 23% be made up as much of good churn as possible because when
people meet somebody they then talk to each other. So within the
Amazon space, do we take that into account or with any sort of
support service where you're getting somebody off the ground and
they outgrow your product because it served its need, right? That's
really the dynamic here. If your SaaS business serves a need that
your users no longer need it that would be good churn. Would that
be taken into account with that churn number very much or are we
really looking more just the throttling on growth and the fact that
you're chasing ever-increasing growth numbers with high churn?
David: Yeah, it's hardly the latter, because if
you think about it, I mean, SaaS valuations, in general, are higher
than any other business model. And the reason for that is because
for every single unit of revenue you're bringing in you can predict
how long it's going to stay with you for and you can't with any
other business. And so helping people out for a shorter period of
time, even if they're then canceling for good reasons while still
brilliant from a customer success standpoint, isn't something that
a buyer would attach a higher multiple to. So you kind of want to
help people for the longest amount of time to create the most
amount of value and that's why I like businesses with very high
lifetime values and their churn are generally speaking, the most
valuable type of SaaS businesses. So, yeah, you've got yourself a
beautiful paradox there Mark with your site. I think in that
situation, you just have to turn into a massive marketing spend
then. You need to post those numbers all over your website and say
people are gleefully canceling because of what we do.
Mark: Well, you know it bleeds out into the other
metrics, I think. And I wish I could say our 23% was good churn.
It's not but it bleeds into be other numbers, right? Because if you
have good churn where it trickles into is your cost of acquisition
becomes effectively lower. So the more good churn you have, the
lower your effective cost of acquisition compared to people that
don't have as good of churn because you have more social proof.
Now, it may not be a very clear or strong relation, it's more murky
but let's talk about ARPU and also a lifetime value of a user. When
we're looking at these metrics, how much does taking look at
cohorts in terms of time play into that? Because I know Chuck sold
a business a while ago, it wasn't directly SaaS. It was sort of
SaaS-y in its makeup, which it was pretty much awash for the first
24 months in terms of lifetime value and cost of acquisition. But
after that 24 month period, everything was profit on top of that.
And I look at that and say that's fantastic. That's great. I get
it. But from a buyer's standpoint, the cash requirements for a
business like that, especially if you're growing rapidly, becomes a
constraint to growth. You have to be able to fund a business with a
24 month period lead time. How much does a cohort analysis play
into a valuation? And I would assume kind of the logical conclusion
here is the shorter period of time to be able to get from your cost
of acquisition to your revenue is more desirable. But is that
something that you look at closely?
David: Yeah, I
mean, from the challenges with LTV in many monthly recurring
revenue businesses, is it's moving around so much. I just sold a
business just recently where the LTV posted up and profit well is
going everywhere from 2,800 to $7,000 month to month. So try
marketing a business with that level of variance. So to your point,
Mark, you do have to look at cohort analysis, I think to go back
and be like, what's the kind of longer-term trend in the business
here? Like what's actually evolving because that business is a
great example, the same phenomena you're talking about which for
two years, more or less, didn't really make any money and then
started to hockey stick. Not so much because the revenue growth was
absolutely phenomenal it’s just because the cost base no longer
needed to go up anymore to substantiate it. They kind of refined
the products enough, spent enough on development, finally figured
out the marketing channels, stopped spending really a lot of both
and then it just started to fly. And that is the case in point for
so many SaaS businesses, which is that it's kind of like swimming
into the dock a bit for an indefinite period of time until you do
hear those unique economics that makes sense. And it just flies
from that point in many cases, anyway.
Mark: I
think that the whole world of trying to value SaaS companies,
especially in this murky range, is a fascinating exercise. When we
do an e-commerce valuation, so much of it is cut and dry and I
think part of that is just due to the volume that's out there. It's
also the nature of these e-commerce businesses as you buy an asset
and you turn it around and you’re selling it so your profit becomes
kind of immediate as opposed to the longer periods of baking and
growth with the SaaS company for the long term, which makes it more
of a complex exercise. So let's talk a little bit about the guide.
15,000 words, you talked a lot about this idea of moving over to
the revenue-based multiplier. I would imagine that there are some
examples. And we joked about this before we started recording, I
haven't seen the guide yet and reviewed it so I'm going to be
speaking a little bit and guessing. I'm assuming that you have some
examples in here and other information. Tell us a little bit about
what's in the guide and what people could take away from it.
David: Yeah, so the guide really breaks down how
to do the traditional SDE approach valuation and the revenue
approach valuation, and most importantly, how to discern the
difference between case studies where you should do one or the
other. And I kind of put a four-part test in there which is really
the size test. Is it or around or above the million dollars in ARR
level? The next thing we look at is where's the revenue growth
trending towards, is it showing these kind of fundamentals we're
talking about 40% plus year over year growth? The next thing is
looking at is this still a business that's kind of a single
owner-operator in a relatively thin personnel business, or is it
starting to staff up with customer success, starting to wrap around
some significant infrastructure to enable it to start going from
one to 10 million dollars? That's a really important kind of
qualitative factor. And then the last one, of course, is churn,
because in reality smaller apps, generally speaking, have higher
churn rates. So you'd expect to be seeing kind of an over tuned 4%
to 9% in monthly churn in immature let's say, and to the immature
SaaS apps. And as you start to get up to this million in ARR level
you'd like to see that really dropped below 4% monthly churn.
That's the big thing, because churn, as every SaaS business more or
less in the world will tell you is the hardest problem to solve for
because it is the ultimate barometer of whether people think you're
creating enough value to not want to churn out and cancel. And so
the more value you’re creating, the more helpful you are to people,
the less they're going to churn. And that's ultimately what anybody
wants to pay for in any business. And so it being the most
difficult problem to solve for makes it the most valuable one for a
buyer to want to buy. So the lower the churn, generally speaking,
the higher the value of the business all else being the same. So
those are some of the key distinction points. And then, of course,
I'm aware that there's both sellers and buyers looking at it. It's
really useful information for both sides to see. Buyers are looking
to buy to grow up and scale, sellers are looking to increase the
multiples, everybody wants to increase value so I put in a bunch of
additional kind of growth value; what I call value-centric growth
levers. And what I meant by that is like what essentially the top
three things that you can do that will most dramatically impact the
most part of the business right away beyond just getting more
growth which, of course, always helps. But like specifically one of
the things that we've seen over the years in Quiet Light selling
businesses, one of the things that we know dramatically increase
the multiples of businesses. So I shared some of those in the guide
as well for both buyers and sellers to look at.
Mark: So if we want to just be trite, we can say
if you want to get a great valuation, grow your business or reduce
the churn, right?
David: Yeah.
Mark: All right, the guide is going to be
available on the website. We will include links, obviously, in the
podcast. You're going to be seeing some emails from us about the
guide. We'll also have a PDF downloadable version of the guide. And
of course, if anybody has questions about the valuation of your
SaaS company and where you fall or questions, I'm sure David would
be more than happy to answer any questions about this as well.
David: Absolutely.
Mark: David@quietlightbrokerage.com.
David, thanks for coming on and enlightening me a little bit on
this. And it's a complex topic, its super interesting, though. You
know, I've been doing this for 14 years now, and it's sort of
refreshing to look at different types of companies, different
approaches to the same problem, and seeing where we can get some
variation. So this is absolutely fascinating to talk about it and
I'm looking forward to reading it, which I should have access to
it. I'll be reading it here soon.
David: My
pleasure.
Mark: Thanks David.
Resources: David’s Article About SaaS
Valuation Quiet Light Podcast@quietlightbrokerage.com
