Niche B2B SaaS/Subscription business - valuation inquiry

July 07, 2023

by a searcher from University of Pennsylvania - The Wharton School in Toronto, ON, Canada

I am actively in pursuit of a niche B2B SaaS/subscription-based business that has US$4mm in EBITDA across 3000+ customers. The business has shown strong long-term stability in the US$7mm revenue and US$4mm EBITDA range but has been range bound as it is self-admittedly undermanaged (run like a lifestyle business) with material opportunities for growth post-acquisition which will require moderate investment to pursue and capture.

I am curious on the Searchfunder community thoughts regarding valuation on a SaaS / Subscription business like this as the seller is seeking US$25mm+ enterprise value (or 6.5x EV/EBITDA).

I am curious on thoughts on valuation range (is this range fair), structuring thoughts to bridge risk / reward and any other insights that may be provided.

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Reply by a searcher
from Harvard University in Scottsdale, AZ, USA

Agree it's high but not unreasonable at all. You are investing in history not potential. Beyond just looking at the financials, you want to also look at Lifetime value vs Customer acquisition cost.. Unit economics matter a lot in SaaS. A min of good LTV/CAC is 3:1 and you want to see that trending up (this will vary depending upon growth). This is called a cohort analysis and is important (happy to chat on this if you want more info) to account for churn. It will vary based on type of customers but this will also help to either validate or can be used to bring down valuation too. Check out customer concentration--doesnt seem like it'd be an issue but just make sure. Note too that there is very very real AI risk associated with software. So, take that into consideration--needs to have a strategy around that because there will be more competitors and AI is making certain use cases obsolete. Also, depends on customer profile as others mentioned of diversity and stickiness. You can also potentially get creative with funding too through ESOPs or creative leverage. However, think about it that if you bought at that price using pure debt, it'd take a min of 6yrs (more likely longer to pay down based on existing ebitda)--assuming you use the full amount in which case you don't have growth capital + interest on debt and other factors etc... Also agree on cash vs. terms per Jonah.

Reply by a searcher
from University of Southern California in Los Angeles, CA, USA

3k customers for $7mm in revenue is 2-3k avg ACV. Small customers could signal a few things - how mission critical is the solution? Goes with the gross retention question. Hard to grow a business with leaky bucket (less than 90% gross retention would raise some concerns). Small customers could present growth challenges… if there aren’t larger ACV opportunities in market… have to onboard 3k customers to double the business, how systematic / repeatable is onboarding a new customer? 3k customers is not a small number for a sub 10mm SaaS business… what is the market? Is this more horizontal (i.e. very large universe of potential customers)? If so, concern would be on competitive intensity as there are likely several vendors competing for large universe of customers. Just some thoughts… I think it comes down to the quality of the revenue and path to double revenue… if good on those valuation seems very fair… if not so good, could prove expensive as that 4mm EBITDA will be challenging to grow

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