SaaS Valuation Dynamics: The Three Value Drivers

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Introduction 

SaaS companies, like all others, are ultimately worth only what the buyer and seller agree upon. This is based on their estimates of the current value of the company’s future cash flows (which may or may not be the same for each buyer). For example, one buyer may see a premium from additional synergies achieved by linking the two businesses or consider that the potential damage to their business from a competitor acquiring the target is too great. 

The strength of your business (management, technology, market position, recognition, financial performance etc.) will all drive appetite and hence competition to acquire or invest in your business. Geographic location (UK, North America, Global) will also factor into some buyers thinking. Negotiation and an understanding of these different dynamics are key to seeing how much of any premium value the seller succeeds in securing from the buyer. 

Whilst the premium is a deal-specific factor, the core valuation can be more generally assessed. The marketplace, both at the time of the transaction and the expected trajectory thereafter, plays a large part in valuation. For example, as I write, SaaS businesses that have proved resilient through covid (most of them) are attracting high valuations as bidders seeking to deploy funds are faced with a more limited range of opportunities across the wider economy. 

Alongside the market environment, a set of company specific assumptions must be made about the predictability of cash flows, growth profile, and the timing of the transaction. Once all these considerations have been taken into account, buyers and investors will be able to calculate their valuation for your company. 

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