[exclusiv]

I was offered approx. 4X SDE for my SaaS by a competitor but thought it was too low.

I felt they should pay even more to get rid of their primary competitor.

I also know what they're up to and their recent strategy benefits their other business but also benefits mine.

I have a hard to acquire customer but have found a way to connect with consistent sources to replace most of the churn with a zero cost of acquisition.

4x was too low for me to pull the trigger. I needed about 8x. Why sell a business at 4x when it's hard to compete with because the customer acquisition and churn is a challenge?

The growth fundamentals aren't as good as other businesses but the risk is much lower. I don't think that is valued enough. Everyone wants to roll the dice on huge growth when 25-50% annual returns are out there, nearly guaranteed for small, auto-pilot SaaS companies.

If I sold at 4x and then said, where can I put that money and get a nearly guaranteed 25% return, I don't think I could find that. That would be risky.

So while 4X may be the upper limit for SaaS valuation metrics like the article states - it's not going to get the deal done for many SaaS companies. And I'm fine with that.

[charlesdm]

Five years is a long time, a lot can happen in five years.

I've made the mistake of not selling an asset fast enough, and that probably cost me $100k-150k (easily!). What might look great today might not in two years.

3-4x does sound reasonable for something that is:

1. Illiquid

2. Taxed as income -> less favourably than capital gains on stocks

3. Requires work, every, single, day

> If I sold at 4x and then said, where can I put that money and get a nearly guaranteed 25% return, I don't think I could find that. That would be risky.

Your SaaS business might get hit with a multi million dollar lawsuit tomorrow and go bankrupt because of it - nothing is certain. But you can definitely get 15-20% returns with proper risk management when investing with your own money. And if structured properly, those gains are capital gains, meaning you pay (a lot) less tax.

[ryanwaggoner]

But you can definitely get 15-20% returns with proper risk management when investing with your own money.

I wish to subscribe to your newsletter.

Seriously, mind sharing some of your secrets for where you're finding these definite returns of 15-20% with proper risk management?

[charlesdm]

As a simple example: the average return of the S&P500 over the last five years has been 16%.

2010: 14,82% 2011: 2,10% 2012: 15,89% 2013: 32,15% 2014: 13,52% 2015: 1,36%

[ryanwaggoner]

That's six years, not five. And the annualized return (geometric mean, not mean) is 12.85%, not 16%.

Worst of all, you picked a short outlier period to consider. If you instead look at the trailing ten years of Feb 2006 to Feb 2016, the annualized return is 6.3%, even with dividend reinvestment. And that's without accounting for inflation, making your real return closer to 4.5%.

Bump up to look at the last 30 years and with dividend reinvestment and adjusting for inflation, you get about 7%. I think that's probably a realistic target to shoot for in the very long run (decades).

Source: http://dqydj.net/sp-500-return-calculator/

[exclusiv]

Good points on the tax benefits, however the S&P historically is about 10% over the long haul. 16% over the past 5 years is irrelevant. I have no control in the S&P.

I have control in my company. I'd rather rise or fail due to myself than say - the market did this.

I max a 401k for tax purposes and do state muni-bonds for safe, decent tax-free monthly dividend income while I decide what current or new business of mine to invest the cash in. The market is basically tax-friendly gambling.

[zaroth]

I don't quite grok the 4x either... Let's say you have a well established (5yr), steady growing (20 - 30% YoY), low churn (5% annual) SaaS with significant custom engineering in the back-end (hard to replicate) currently at $1.5m of revenue. Two co-founders earning $140k each, and $250k EBITDA...

I'm not sure you can add back the full $280k to get $530k SDE, but even still why would you sell something like that for $2m? P/E of 8? 1x forward revenue? Is that really the benchmark?

[jkaljundi]

At that scale and growth, P/E of 6-10 and 1-2x forward revenue multiple sounds reasonable.

One thing to keep in mind is the technological risk and market change over next 5 years. Does your cost base guarantee that you keep investing and changing the business so that after 5 years you are at the top of market again?

Products, services and companies come and go. The buyer needs to take into account the risk of you being outcompeted on the market during coming years. Has happened to many smallish B2B SaaS companies.

The buyer also always has a huge risk of transitioning from current founders and management.

[metafunctor]

Selling at 4x makes sense if you already have another business that you could grow faster with that cash available to invest now rather than later. Especially if your new business has the potential to grow much larger than the old (say 10x or more).

Also, perhaps you believe your time is better spent on the new business, rather than tending the old. This is especially relevant if the business you're selling takes a lot of time to run.

But agreed, if you have nowhere to invest the cash, selling at 4x seems like a bad idea.