There is a great blog from a VC at Redpoint by Tomasz Tunguz. In it he discusses every kind of SaaS business you can think of. He has a great article that analyses pricing over the last six years (read more). The large trend in SaaS is about a 3-4 times multiple of net. Online businesses are typically calculated from their net profit (income minus expenses), so a business that generates $100,000 a year in free cash flow/profit would sell between $300k to $400k.
There are many factors that determine pricing, but a few of the mains ones are:
- Age of the business – is this a track record of earnings more than a couple years or is this business only a year old?
- Quality of the product – do customer really need and value what you are selling? Do they stick around? What’s the churn rate?
- Easy of management – does the Buyer have a long road ahead to on-board this business or can they take it over easily? Businesses that are setup correctly where the owner can swap out are worth a premium. This means to have processes and employees in place to handle the day to day tasks.
- Longevity and potential growth – is this a fad based business or is there a real growth path? How has the business been faring the last few months/years, growing or declining? Have they been keeping good metrics and have quality customer lists?
There are many other factors that go into a great web business (brand-able is huge), but this covers the top level. We have written about due diligence before, so business owners should conduct their own version of it before trying to sell. This can often pay for itself by fixing a small issue the Buyer can work the price down with.
Interested in selling your business? Contact us today and we might buy it.