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Software as a Service or SaaS is an exciting industry filled with many different opportunities. If you are starting or running a SaaS company, it is important to understand the way that the metrics used in SaaS valuations can improve the value of your organization before selling. Do some research as there are a number of resources online, and it maybe worth turning to SEO as part of your go to market as these strategies will also help you boost your customer reach in a good way. Keep reading to learn more about the basics of SaaS valuations that are important to your business model.
How are SaaS Companies Valued?
It’s common to not be fully sure how investors determine the value of a business. Before an investor or a valuer reaches their final assessment, various factors come into play. They may not always be related to the size of the business or the rate at which it has been growing, either. SaaS businesses are valued with multiples, which include a combination of different factors that impact the company. To learn more, this is a good resource for SaaS valuation multiples.
Consider the following factors that influence how much a SaaS company is worth:
Owners Responsibilities
Many companies depend a lot on the input of their owners. This means that their success or failure is highly reliant on the competency of the owner, which can play a part in how much the business is worth. To avoid a devaluation for this reason, owners should consider setting up their SaaS business to be independent by employing qualified and responsible management and employees. A team that can complete the daily tasks required by the company with little to no supervision is the best set-up to allow the business to progress without depending too heavily on just one person.
Operating History
Taking a retrospective look at a company can make it easier to assess whether or not the company has been profitable. This also allows the investor or valuer to more accurately estimate how much growth the business is likely to experience in the future.
Customer Metrics
Investors will also take a look at customer metrics to get a better idea of the pattern and quality of the company’s revenue. Looking at customer metrics will help investors get a clearer picture when it comes to deciding when they can expect to see the profits from the purchases.
Product Lifecycle
Investors are often more interested in purchasing SaaS companies that profit from products that are still in the growth phase, rather than one that has been in the market for a long time.
Churn Rate
This refers to the speed at which customers cancel their subscriptions. To determine your SaaS customer churn rate, divide the customers that have canceled their subscription within a given time period by the number of customers you had when the period began. A low customer churn rate indicates that the business has growth potential.
Monthly and Annual Recurring Revenue
Many modern SaaS businesses utilize the subscription model, which is usually paid either monthly or yearly. Due to this, monthly recurring revenue is often taken into account to value a business. This refers to the amount of income that the business makes from recurring customer subscriptions.
How to Boost SaaS Business Value
Now that you know the main factors that go into the value of a SaaS business, the good thing is that you can easily regulate and improve them to boost business value. Focus on reducing churn, maintaining accurate documentation, collecting customer metrics, and outsourcing development and support. You may also want to hold off releasing any new products if you are thinking of selling your SaaS company in the near future.
Now that you know what goes into determining the value of a SaaS business, you can start putting together a clear framework of what to focus on to boost your company’s value.