The SaaS business model has enjoyed monumental growth in recent years, and though nearly ubiquitous at the enterprise level, the vast majority of SaaS businesses are either owner-operated or run by small teams.
In this piece, we walk through the basics of valuing a SaaS business, with focus on areas where owner intervention can positively impact the value of the business.
About Holborn Consulting
We are an advisory boutique in London, specialised in supporting high-tech firms in the B2B market development. Main services include: Lead Generation, Business Development Outsourcing, Market Research and New Market Entry services.
Straight to the point: how much my SaaS can be valued?
When valuing a technology business, the first question is whether to look at a multiple of SDE (Seller Discretionary Earings), EBITDA or Revenue.
Most small businesses valued at under $5,000,000 are valued using a multiple of SDE, with:
SDE = Revenue - Cost of Goods Sold - Operating Expenses + Owner Compensation
Note how SDE is generally highly dominated by the Revenue factor.
SaaS businesses typically fall within the 3x – 4.75x annual profit (SDE) range, and this can be determined by a large number of SaaS metrics.
SaaS evaluation = 4 x SDE
There are different ways to evaluate a SaaS firm, but the aforementioned simplified formula allows anyone to estimate the value of a private SaaS with good approximation.
How an SDR can impact this evaluation: some math
SDRs (Sales Development Representative) are a type of sales reps that solely focuses on outbound prospecting.
For simplicity's sake, let's say that a SaaS company with €5M in revenue can be valued
€5M x 4 = €20M
So if your Sales team closes a $50K deal, then the SaaS firm value just increased by $200K.
The average cold outbound SDR in Holborn Consulting helps Account Executives to close an additional $300K in revenue per year. Therefore, investing in an SDR will increase a company valuation by $1.2M, with an average yearly cost of €100K (salary, benefits, tools, management costs, etc.).
Therefore, investing in an SDR will increase a company valuation by $1.2M
Conclusions
Is this evaluation model overly simplistic? Of course. What about Total Addressable Market (TAM), retention, gross margins, churn rate and “synergies”? All are important. The world is full of variability and nuance. However, if you step back and look, the formula represents a good "rule of thumb", providing a good place to start an informed valuation discussion.
Regardless of whether or not you are currently considering an exit, a thorough understanding of how to value a SaaS business creates the opportunity to positively impact your business. This is especially true, when it comes to the decision of engaging with SDRs.
Pros and Cons of hiring an SDR have been faced in this article (4 Reasons to Not Outsource Sales Development - and 3 Reasons why you should).