Business Entrepreneur

How to estimate and sell a SaaS business in 2022

saas business

The percentage of enterprises that are now adopting cloud-based SaaS to improve the speed of IT service delivery only continues to grow. SaaS development companies offer full-service development services to those who are starting the adoption.

Accurate performance predictions and meaningful improvements in business processes come from a high-quality measurement approach. Trying to measure everything, the important aspects are lost, including strategic planning. In this article, we take a concise overview of how to estimate your SaaS business in 2022.

Which SaaS metrics matter most?

The proper measures, namely numbers and statistics to track performance and progress towards your business goals, are the key metrics for accurate SaaS solutions evaluation. Here are some important metrics for SaaS companies to consider.

1) Churn.  The churn rate is a percentage that shows how many customers and/or revenue were lost over some time. Specifically, the percentage of customers who sign up for your services and leave. Since this metric addresses all the key factors that affect the expected future cash flow of a SaaS business, it also displays the satisfaction of your customers. This means the importance of this metric cannot be underestimated, with the long-term impact on the business in mind.

Keeping customer churn low is very important as long-term customers contribute to sustainable business growth. If you notice an increasing trend in churn, it’s worth providing additional value for your users. 

2) Customer retention rate (CRR). In contrast to the previous metric, this one shows the percentage of customers who sign up for your services and stay. Due to the fact that СRR will tend to a high figure, you can eventually avoid investing in costly strategies to attract new customers. 

3) Cost of attracting a customer (CAC). This is an estimate of the total cost of marketing and sales, which shows how much it costs to attract new customers. The lower this indicator is, the more profitable it is for your business. There is no standard CAC figure, as it varies from business to business, given the market, business model, and many other factors.

4) Lifetime Customer Value (LTV). This metric displays the average amount of revenue received from a customer for as long as they pay for the service. The higher the LTV, the more valuable each new customer is to the business. As with CAC, there is no standard LTV number.
We have listed a few of the important metrics that may be crucial for your business. But depending on each different type of business, the number of priority metrics can vary.

SaaS cost and app development components

To understand how the cost of creating a SaaS application is calculated, let’s discuss the main aspects of SaaS product development.

1) The scale of your SaaS project. The first thing to determine is what kind of SaaS product you are going to build. Depending on your needs, you choose between tools and platforms. Then you will vary in scale, and hence the cost of creating a SaaS application will be different. 

For example, tools like Buffer a tool for managing social network accounts have limited functionality, and are designed to eliminate only a few problems. Facebook is an example of a platform, which often consists of several tools. Consequently, both the functionality and scale are expanded. 

2) Implemented functionality. It follows from the previous point that the more features your product has, the higher the price you have to pay. To not overpay for unnecessary features, think carefully about your must-have features first, and only then the non-essential ones. 

The essential ones might be the following: 

  • Role-based access allows you to set different permissions of diverse confidentiality within the team. 
  • Analytics dashboard that allows you to track which business processes are worth improving.
  • Audit trail can track user actions and prevent suspicious activity in an account.
  • Advanced security features that enable you to protect sensitive information.

3) Choosing a development team. If you don’t have your own development team to build a SaaS application, you can partner with a SaaS application development company. Given that these companies offer full-service development services, the services will cost more than if you were to hire freelancers. However, by deciding to save money you risk playing roulette by hiring non-software companies as they will not guarantee quality at each stage of the SaaS development process.

4) API integration. You can create the backend functionality of your SaaS product from scratch or through API integration. The second option will be cost-saving in this case. This option will also allow you to scale your business quickly. 

Considering the high competition in the market, we would advise using the budget efficiently, and therefore not reinventing the architecture of the existing SaaS application.

How to raise the value of your SaaS?

By taking the right steps, you have the opportunity to increase the value of your business by hundreds of thousands of dollars in a business exit strategy. Below we outline several strategic steps to consider to increase the value of your SaaS business before you decide to sell it:

1) Reduce churn. We already mentioned that reducing churn is an important aspect of business success. It’s also a measure of the value of SaaS, which should be minimal before going to market. 

2) Outsource development and maintenance. Effective outsourcing is what helps raise the value, whereas a haphazard attempt to move some processes to unqualified teams — will not have a positive impact on your business value. 

3) Strengthen intellectual property (IP). This step seems obvious, yet many business owners neglect or simply ignore this point. For large deals (over $500,000), IP protection, namely the execution of a trademark application, becomes a critical step before the business is sold. It’s also important to mention the critical step signing of an agreement transferring the IP rights to their work by each person who was involved in writing the code and developing the product. 

Having gathered information about what components make up the price of SaaS, let’s take a look at what options there are for selling a SaaS business.

How to sell a SaaS

SaaS company or business owners who want to sell their SaaS usually have three options:

1) Marketplace. If you want to sell a business on a marketplace, let’s say BizBuySell, you need to make beforehand preparation of information and an ad to interest potential customers.

From the pros it is low-cost with a large distribution if you place the ad in a large network with a good reputation. On the downside low demand due to the low entry threshold to such platforms, spending a lot of time on checking the customers, the process of approvals, etc.

This option of selling your SaaS business can be useful if you already have experience in such sales and understand the specifics of this marketplace.

2) Auction. This option simplifies some processes compared to the marketplace. On the auction, you can quickly place your ad on a potentially large network for a fixed amount of time — a week or a month.

The downside is that you may end up with a selling price for your SaaS that is significantly lower than what your business is worth. Also, such auction platforms charge a commission for completed transactions.

3) Broker.  Hiring an expert to sort out all the details and get the best price looks like the smartest option. We suggest this option is worth using if your SaaS business is worth more than $20,000. An experienced broker will help you through the sale, including developing marketing materials, contacting potential buyers, negotiating offers, drafting a contract, etc. The downside of this option is that it will be the most expensive option of those listed.

And, of course, there is always the option to figure it all out and do the sale yourself.

Conclusion

Proper tracking of performance-related metrics and proper resource allocation ultimately enable effective business evaluation. 

The SaaS business continues to benefit from tremendous growth potential in 2022. So to increase your business valuation to reach its maximum potential, focus on setting up accurate measurements.

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