Software Reseller Valuation?
December 05, 2024
by a searcher from Northwestern University - Kellogg School of Management in Dallas, TX, USA
Hi, I'm in the process of assessing the value of a software reseller but in a little bit of a dilemma.
The seller believes her company should be valued like a SaaS company. I am not aligned with this as she is not developing the software but merely reselling it making margin based on the discount received from the software company. In addition, it is not a pure SaaS model, i.e. does not generate a monthly recurring revenue but rather, she collects an upfront payment with annual maintenance that sits as deferred revenue in the BS.
Question: Can anyone point me to precedent transactions, valuation reports, or other sources that I can use to convince the seller otherwise?
from Northwestern University in Toronto, ON, Canada
You are correct that a VAR wouldn’t get the same multiple as SaaS. Even in IT services, an MSP with 60% recurring revenue is going to get a higher multiple than a biz that just resells software and will still be less than SaaS.
Two other groups you can try and find some data to slice and dice: Service Leadership Index (SLI) and ^redacted. SLI is now owned by Connectwise but does a lot of data collection and produces content to help business owners know their value. Look for some podcasts that might have what you need. Paul has a valuation tool that also may help.
from The University of Chicago in Chicago, IL, USA
Explain to seller Saas is ARR. a) Growth, b) many have negative EBITDA due to start-up costs or high fixed costs, v) buyer can eliminate many expenses, etc.
All businesses sell for future cash flow, no if and buts.
Few years ago, I had a SaaS business that did not have any of the points (a, b. c) mentioned above. Seller wanted ARR valuation. I refused to take on listing. Seller went out of business few years later when a competitor had a better mouse trap.
Another example: A SaaS business in NY had sales of $7 M w/ low EBITDA. Sold for 3x Gross Profit multiple to a NJ strategic buyer who eliminated $3 M of R&D. expense.