There’s an old saying: “Value is in the eye of the beholder.” When it comes to selling your SaaS business, this couldn’t be truer. Different buyers will come up with different valuations depending on their goals, models, and assumptions. But when I sit down to figure out what your business is worth, I like to keep things simple.
At its core, the value of your business comes down to one thing: the free cash flow it can generate over an extended period of time. When forecasting what that will look like, we take into account the market factors, best practices we could apply to the business (based on our benchmarks). If you’re willing to stick with me, I’ll explain how we figure it all out in plain English.
Step One: Think Like You’re Talking to Family
Let’s say you’re sitting across the table from your sibling or a close relative. You’re not trying to sell them your business — you’re just having an honest conversation about what you think it can achieve over the next 10 years. You talk about: how much revenue you expect to bring in each year, what your costs might look like, how the market and competition might shape things. Once you’ve mapped all that out, you’ll have an idea of how much free cash flow (the money left after all expenses and taxes) your business can generate each year for the next decade.
Now, at the end of those 10 years, your business won’t just stop running. It’ll still have value — that’s called the terminal value. You calculate this by assuming your business will keep growing at a steady, modest rate after Year 10 (We use what’s called the
Gordon Growth formula to determine that). Add that terminal value to the free cash flow from the 10th year, and you’ve got the full future cash flow of your business.
Step Two: Bring Those Future Dollars Back to Today
Here’s the thing about money in the future: it’s worth less than money today. If I offered you $1,000 today or $1,000 ten years from now, you’d take the money today — because you could invest it, grow it, or spend it now. That’s why we discount future cash flows to figure out what they’re worth in today’s dollars.
To do that, we use a formula called the discounted cash flow model (DCF). It’s a fancy name, but all it really does is help us take those future earnings and calculate what they’re worth today. Our goal is to make a 20% return on our investment. Sometimes we adjust the rate downwards to 17% (for larger businesses particularly that contain less risk) so we price the business accordingly. We use tools like Excel’s XIRR function to plug in the numbers and get a clear picture of what we’d pay for your business today to hit that return goal. If you want to play around with the math yourself, here’s a great guide to check out:
DCF Formula Guide.
When the Future Looks a Lot Rosier Than the Past
Sometimes, a founder will forecast big growth that’s way beyond what the business has historically delivered. And there may be good reasons for that: you might have just launched a new product or approached a new market. If that’s the case, we’ll often suggest an earn-out.
An earn-out is simple: instead of paying the full price upfront, we pay part of it now and the rest later — but only if the business performs as you predict. If things go well and the business grows, you’ll end up with a bigger payout. This approach works well because it protects both the buyer and the seller.
Most sellers we work with actually earn more through an earn-out because they share in the upside of the business’s future success. The downside is that it takes longer to get all the money, but in many cases, it’s worth the wait.
Other Factors That Come Into Play
Now, I’d love to tell you that valuing a business is as simple as plugging some numbers into a spreadsheet, but the truth is, there are a lot of other factors at play. Here are just a few: Is your revenue recurring (like subscriptions) or one-time? Recurring revenue is worth a lot more. Are your costs under control or do you need to course correct? High costs can drag down value. What is your market position? Is your niche exposed to changes that could redefine the value proposition of your products? How competitive is it? Are your customers loyal (we look at churn rates for that). These factors — and many others — all play a role in determining your business’s value.
A Word About Prices shared by Brokers
Before we wrap up, let me give you a quick piece of advice: be careful with broker valuations. Brokers are a bit like real estate agents. If you’re selling your house, a broker might give you an inflated price to win your listing. But once you’re on the market, reality sets in, and you might not get the price you were promised. It’s the same with businesses. Brokers often give optimistic valuations to secure your mandate (they mostly are exclusive), but the only numbers that really matter are the ones serious buyers are willing to pay. Not all brokers are the same. We have worked with great brokers that have helped sellers and us tremendously to get deals closed.
Let’s Talk About Your Business
At the end of the day, the best way to find out what your business is worth is to start a conversation. Even if we don’t strike a deal, we’ll give you honest feedback on where your valuation stands and what might help you improve it. Valuing a business isn’t about guessing or hoping — it’s about understanding the facts, trusting the numbers, and finding common ground. If you’re ready to explore the value of your software business, we would love to talk to you.
