This white paper is written for entrepreneurs, angel investors, and the management teams of SaaS businesses. The intent of the paper is to describe the approach used by most professional investors and strategic buyers to value a SaaS company. By better understanding the conceptsand mechanics of valuing a SaaS business, management will be better able to articulate and maximize the value of their company, and also have a clear and more accurate estimate of the likely outcome of a sale process or equity raise. The framework described in this paper is designed to be adaptable to the public stock market environment well into the future.
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SAAS COMPANY VALUATION
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HOW TO VALUE A SAAS COMPANY
This white paper is written for entrepreneurs, angel investors, and the management teams of
SaaS businesses. The intent of the paper is to describe the approach used by most professional
investors and strategic buyers to value a SaaS company. By better understanding the concepts
and mechanics of valuing a SaaS business, management will be better able to articulate and
maximize the value of their company, and also have a clear and more accurate estimate of the
likely outcome of a sale process or equity raise. The framework described in this paper is designed
to be adaptable to the public stock market environment well into the future.
Like all businesses, a SaaS company is worth what a buyer and seller can agree upon, and is based upon an estimate
of the current value of its future cash flows. That simple sentence includes two important concepts: 1) real SaaS
valuations are determined in the marketplace between two parties, and 2) the basis for the negotiation is a set of
assumptions about the size, timing, and predictability of the future cash flows generated by the business.
In the following pages we will try to add insight into both the general parameters of the marketplace, and the key
assumptions about future cash flows common to all SaaS businesses.
The paper is broken into seven sections:
1. Basic Valuation Formula
2. State of the Markets (Public and Private)
3. The Private Company Discount
4. Company-Specific Value Drivers
5. The Balance Sheet
6. Other Value Drivers
7. Example Valuation Analysis
The Basic Valuation Formula:
For SaaS businesses, the net present value of future cash
flows has been reduced to a shorthand formula based on
a multiple of the company's annualized recurring revenue
(ARR).
ARR x Multiple = Company Value
WHITE PAPER: COMPANY VALUATION
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