[CamatHN]

Great article but I disagree with his multiples.

On average for Fortune500 companies the standard multiple is around 15 times earnings. x20 or so times for Technology. Granted these likely are the dominant player and are much more stable but Saas companies have growth potential that likely exceed such companies.

I think the 4x earnings upper limit is extremely low, especially as there is likely a reason they are trying to buy you out, not just from keeping it relatively stagnant in terms of development and collecting profits. I think at a minimum x10 earnings for a substantial Saas would be the low bar estimation by me.

Lets be reasonable, otherwise you would just hire someone to maintain and just cash in if we are talking about a company like this article is talking about.

[ThomasSmale]

The multiples we discuss are related to SaaS businesses below $5m valuation. Fortune 500 companies are indeed valued differently, usually on a multiple of EBITDA or similar.

10x is very high. Sure, there will be a few deals at that level, but the majority are not. Our data is based on over 50 SaaS sales below $5m we have completed so is not just made up or an "estimation". It's where 90% of SaaS businesses will fall if you want a high degree of certainty when selling.

There are lots of reasons people sell businesses instead of hiring someone to run them:

- to reinvest into other growing businesses

- they are no longer interested in the business (it's not always about money)

- the business is a mental distraction. Sure, you can hire someone but you still have to think about that business

- to benefit from a lump sum of cash now vs waiting 3/4 years, usually at a lower tax rate (capital gains vs income tax).

[patio11]

Multiples are just prices, and prices are set where buyers and sellers agree. Fortune 500 companies are not operated like, or sold like, SaaS companies with $1k, $10k, or $50k MRR. People who buy SaaS businesses for $50k to $5 million generally offer 2~4X. If you think they're really, really worth 10X, start offering 5X and making out like a bandit; I predict you'd become fast friends with a lot of SaaS owners.

[55555]

The private "small-cap" market is way less liquid and companies are way less valuable according to the market. If you subscribe to FEI's newsletter you'll see that most young SAAS companies are actually finding buyers who are only offering about 2 years profit. It's also a lemon market, which is unfortunate. I recently sold a SAAS and got 2 years profit.

[jkaljundi]

It depends mostly on growth. 10 P/E is OK if you grow 2 x year as a large company or 4-5 x per year as a smaller company. Not if you're a small company growing up to 2 x per year. 10 x earnings means huge growth and potential upside.

Also see Tom Tunguz' post on benchmarking SaaS companies from a few days ago: http://tomtunguz.com/benchmarking-exceptional-series-a-compa...