***Still need to proof in Google Doc, then paste it here***
In this essay, let’s talk about three things that you can do in your software or SaaS business that will actually help make itself higher than average market value.
By that, I mean you can get a higher multiple from a buyer because you have these three things in your business.
Some businesses have this inherently in the business, which is fantastic, and other businesses you have to work to get these features in there so that you are in a prime place to sell your business for top dollar.
As a buyer, these are the three things that I’m always looking for in a new business that I’d like to acquire.
If you’re running a software business, especially a SaaS business, these things are actually pretty important when you’re trying to sell, because from a buyer perspective, this is what we’re looking for most of the time.
Bad Advice from the “Entrepreneur Community” & Two Sets of Customers
A lot of times, you’re being told by your professors or the entrepreneur community to do things that do not actually match up with what buyers are looking for.
Remember, you always have two customers for your business. One customer is the group that you sell to on a monthly and annual basis, and the other customer is the group, person, or team that you’re going to sell the business to in the future.
Most businesses don’t think of the second customer, come up with a future buyer. I’m trying to help in this article to get you to think about that future buyer.
Predictable, Boring, Routine Revenue Growth
The first thing is we’re looking for predictable, boring, increasing revenue growth. Even if the revenue growth is very small, even a small percentage each month, over many years that starts to make really big differences.
Personally, I have a few companies that make a very small increase each month, but now that I’ve owned them for five to ten years, it makes a massive difference in my revenue.
That’s what buyers are looking for, something predictable, even if it’s boring, we’re not looking for hockey stick growth. In the entrepreneur community, you’re always told to try and go for hockey stick growth, put your business on product hunt, which as a seller is a terrible.
idea and that you should be acquiring users no matter what the cost. All of that popular advice that entrepreneurs get is not helpful when you sell the business and actually will harm the sale price of your business.
If you’re selling on Product Hunt a bunch of lifetime subscriptions not only will you not get any revenue from them in the future you will not get any value when you sell the business and you will get a discount because the buyer now knows the best customers for this business will never buy from the business again.
Product Hunt is one of the worst things you can do for your business if you’re ever going to sell it.
I’m going to go into that in a different article but I thought I would make an aside in here.
We want something that’s predictable, something we can plan out long term. We want to be able to model it out so that we understand what’s going on one, two, and five years from now so that it’s all predictable and reliable growth.
That’s the first key point. The second point is high profit per head count. One of the biggest differences I’m seeing in 2024, probably into 2025, is a lot of businesses that used to be VC funded.
Now that VC funding has dried up, they are inventing profit by cutting out some of their marketing and sales, but they have a huge head count.
They’re trying to sell at the same multiple as a business making the same amount of money with a low head count.
Those are not the same companies. For example, let’s say you make a million dollars in profit per year, but you have 40 employees and you took on investment from Silicon Valley.
It is a completely different business than a company that’s making a million dollars, has one contractor and maybe the original entrepreneur.
Those two are valued completely different. You can say, hey, the industry average is 4x for SaaS businesses. True. But if you’re bringing 40 employees and a retirement program and health insurance programs and expect to get the same valuation as the business that has none of that and is leveraging 4x 5x the profit per headcount, I’m here to tell you that’s not going to happen.
You can’t expect them to be the same as a business that’s simpler to run with smaller headcount. So, remember, the second important thing is to have a high profit per headcount.
Focus on that. Do not add headcount just to try and seem larger. The third thing that’s important is stickiness, which we usually call low churn.
This is a business that’s very hard to pull customers away from. That’s why I look at companies that are infrastructure, developer tools, and things that people either love or can’t remove from their system without breaking their business.
That’s what we as buyers are looking for, low churn with software that is hard to remove from a company.
If you have those three things, then you can sell for a higher than average multiple. So the three things, again, are boring, predictable revenue growth, high profit per headcount, low churn with a sticky product or service.
If you have those things, buyers are going to salivate for your business. I’m always looking for those types of businesses.
I would pay a higher multiple for it. So if you can spend a year or two working on your business, adding those pieces in there, getting the headcount down, making it more sticky, making your revenue more predictable, you’re going to be able to sell for a much better multiple in the future.
It’s worth the investment right now because buyers like me in the future want to give you more money when we buy a better business