For any Software as a Service (SaaS) company, finding effective financing solutions can prove difficult. Despite the increased focus on this business model and financing solutions, many SaaS owners don’t know how to accurately value their company. Without a correct SaaS valuation, you won’t be able to get the financing options that work best for your business. We want to help you understand SaaS company valuations and the impact that has on your financing options.
How to Determine the Value of a SaaS Company?
Determining your company’s valuation can be a difficult process that involves the input of outside investors. However, valuation of SaaS companies on public markets differ from those on private markets.
For fast growing public SaaS companies, this number is easily determined. The most common formula for SaaS companies on the public market is enterprise value (EV)/annual revenue. You can determine the enterprise value by adding up equity and debt and subtracting all cash on the balance sheet.
Determining the value of fast-growing private SaaS companies is much more difficult, however. One of the best multiple-based formulas for determining the value of your private SaaS company goes something like this: annualized recurring revenue (ARR) x multiple = company value. There is not an exact science for determining the SaaS multiple. Generally, however, anything that affects future monthly revenue, cash flow, or the growth rate will be a factor.
Thomas Smale, CEO of FE International, says in an article about SaaS valuation that “hundreds of different data points” impact the multiple. For him, “these boil down to the transferability, scalability, and sustainability of the enterprise,” and includes factors such as financials, traffic, operations, niche, and customer base.
Another factor that can influence the value of your SaaS business is the relationship between revenue retention and churn. A study conducted by SaaS Capital Insights found that “for every 1 percentage point increase in revenue retention, a SaaS company’s value
increases by 12% after five years.”
Conversely, churn, which is the loss of expected ARR, can lead to negative valuation. Retaining revenue is of particular importance to your company’s valuation because it impacts many other factors, such as your actual revenue, your addressable market, and growth rate.
It is important to note here that for private SaaS companies there is no objective valuation. So what impact can a subjective value have on the public or private SaaS business’ ability to obtain financing?
What Impact does This Valuation Have on Financing Options?
Regardless of what type of financing options you want, your company’s value will influence the terms of your SaaS financing. For venture capital and other types of equity financing, the higher your company’s value the less ownership you will have to give away.
While higher valuation generally helps you keep more equity, Jeff Erwin says that you shouldn’t always choose the investor that values your SaaS company the highest. More influential firms can offer “lower valuations so they get more equity for their investment. They also bring deeper pockets for later rounds, very seasoned expertise and relationships with companies that you will want to do business with.”
In terms of debt financing, valuation can also impact what types of interest rates, terms, and collateral requirements are included. As the chart below shows, there are a variety of debt and hybrid funding options that SaaS companies can choose from depending on their needs and expectations.
Further down the road, the valuation of your company will have significant impact on your profits when/if you try to sell your business. While choosing a lower valuation may have allowed you to obtain ideal financing options earlier, it also can limit your profits.
How does RevTek Finance SaaS Companies?
Here at RevTek, our goal is to give you the best possible financing model that will increase the valuation of your SaaS business. Our model is simple: we provide you with growth capital that you need to expand your operations (and therefore, the value) of your business in exchange for manageable monthly payments based on your monthly, recurring revenue.
We don’t take equity, we don’t need a seat on your board, and our terms and execution are simple. To be eligible, you needn’t be profitable, but you should have a predictable recurring revenue of at least $50,000 a month.