The State of SaaS in 2025

SaaS Multiples, Growth Strategies, Valuations, & Exit Planning

SaaS M&A experts Jon Hainstock and Tom Buchok dive deep into the SaaS market landscape, breaking down how valuations work, what buyers are looking for, and how to position your business for a successful exit. In this informative video, you’ll also hear personal anecdotes from both of their experiences as SaaS business owners.

Thinking about selling your SaaS business? Understanding market trends, valuation strategies, and the right timing for an exit can make all the difference in securing the best deal.

Key Takeaways:

• [0:00] Intro – Meet Jon Hainstock & Tom Buchok
• [1:32] Why SaaS founders should start exit planning early
• [3:45] How SaaS businesses are valued (SDE, EBITDA, Revenue Multiples)
• [7:20] The most common mistakes when preparing to sell
• [10:15] Why clean financials & operations matter to buyers
• [14:30] How market trends impact SaaS valuations
• [17:10] Niche vs. Horizontal SaaS businesses – Which sells better?
• [22:45] Churn, retention, and customer concentration – Key valuation factors
• [28:00] What buyers look for in a SaaS acquisition
• [33:15] Market trends – Is now the right time to sell?
• [37:00] How to increase your SaaS business valuation
• [41:20] Final advice for SaaS founders considering an exit
• [44:10] How to connect with Jon & Tom for SaaS growth and exit planning

TRANSCRIPT

00:00 Intro – Meet Jon Hainstock & Tom Buchok

What deal structure might look like, and what types of metrics are most important?  What are we doing as a company, and where are we headed?  What are benchmarks within that market?  What is the range of values of my business, and where am I today?  Where do I want to go?  What type of multiples are they using, and what are the key metrics they’re looking for?  Quiet Light can help you value that business.  The real first step is get in touch with Jon and have a conversation about where you fit in the market yourself, individually.

Hey, everyone.  I’m Sam from Quiet Light.  I’ve got one of our senior advisers, Jon Hainstock, with me today, and Tom Buchok, who is an adviser for SaaS companies.  They are going to talk all about the state of the SaaS market.  Lots of great learnings.  I will hand it over to them.

Thanks, guys, for joining.  Jon and I are together today because we thought it’d be good to share some of the stuff that the team at Quiet Light, and Jon specifically, is seeing out in market.  I work with independent SaaS companies for them to grow, to hit their goals, and how we do that is by kind of starting out and saying, you know, what’s the market look like, and how does that compare?  What Quiet Light offers is the ability for us to kind of understand, you know, what’s the state of the market?  As we go through today, I think what Jon and their team over there sees and has access to is really interesting.

Well, Jon and I come at this from a place of having started, operated, and eventually exited software businesses.  I think that anybody who is looking for an exit in the, you know, one- to five-million range, we’re here to talk to you today and provide you with some ideas and thoughts on what’s going on in the market, and how to run your business successfully to hit that dream exit, or keep growing and keep running the business that you want to run.

01:32 Why Saas Founders Should Start Exit Planning Early

Yeah, exactly.  It’d be cool to… I’ll share a little bit about my background too, and then, Tom, maybe you can share about how your exit process went.  This is not going to be a long bio here or anything like that, but I’ll just share from my perspective.  When I sold my SaaS business, it was not something I prepared for personally.  It was something that kind of came out of the blue.  So I think my perspective now is to try to help people prepare for that, usually six months through a year in advance, potentially longer, and to think with the exit in mind and prepare backwards, and then just have the conversations that I was kind of rushed through, and the decision process I was rushed through due to the way that the sale came about, which was the buyer reached out to us and we weren’t quite ready to sell.  We went through another year, and then it kind of somehow surprised us again when they came back to us again.

So that’s kind of my background, my experience.  Definitely been in the trenches of operating, you know, every single day in the B2B SaaS world.  So that’s my perspective.  And now, just being able to work with other SaaS founders, primarily bootstrapped SaaS founders or lightly funded SaaS founders, it’s just a joy.  I love to be able to kind of work through how buyers are most likely going to perceive their business, what they can do to maximize their valuation, their exit, and all that stuff.  But, Tom, your experience was, I think, a little bit similar in that I think you had some direct outreach.  Would love to hear a little bit about that too.

I also, like, I loved my personal journey.  I really enjoyed running my business and everything that that entailed.  And then one day we got interest.  There’s always kind of, if anybody’s listening, sometimes we get interest, and we might get a cold email here, and it’s hard to parse out what’s real and what’s not.  You know, be cordial and respond, but don’t distract yourself from, I guess, operating the business.  But like you, Jon, this inquiry ended up becoming something material and ended with me selling my company.  That wasn’t my objective.

03:45 How SaaS Businesses Are Valued (SDE, EBITDA, Revenue Multiples)

I tell people that if your backup option is that you’re happy running your business, it provides you with a lot of clarity.  I think any big process, whether it’s buying a home or selling a company, is overwhelming, and there’s lots of new things to learn.  If we’re feeling comfortable with our business and it’s not in some distressed state, that gives us, even if somebody comes around and asks to buy it, a pretty good negotiating position.

I work with companies that want to put themselves in the best position to grow it themselves, potentially, and all the while enjoy running it.  So what I like to say is, I don’t focus on the income of your business, I focus on the value.  What that means, it’s really the same things when we’re thinking about potentially selling our business or just running it.  We still want to focus on the intangible values and the things that make it, you know, give us that higher multiple.  And we’ll talk a bit about that today and how that relates to the state of the market, valuations at any given point in time.

We can really kind of pinpoint and set our compass to good, clean operations and strategic focus, and that gives us the best chance to succeed as business owners at any time.  It’s kind of agnostic to time and place and business conditions.

Yeah, that’s what I’m really interested to hear you chat about more, Tom, is actually the operational side of things and what made it a business that you enjoyed running on a day-to-day perspective.  I think we’ve discussed this offline a little bit about your team and some of the things that you were doing on that side, and just how that affected how the business was perceived by buyers.  So we’d love to hear a little bit about your philosophy around that, and some of the things that worked for you, just to kind of give somebody a picture if they’re maybe solo founders or they have a very small team and they’re starting to build around themselves, you know, build up and delegate.  This is, I think, a great time to hear what Tom has to say about that.

That’s where also knowing what’s going on in market from you, Jon, is we can say, like, well, here’s how things work, and you can say, this is how it impacts.

So as we dive in, the most important thing, Quiet Light and Jon specifically are able to have detailed conversations.  Every business is going to be valued differently for all of the variety of permutations of what’s happening in operations, your business model, your relationships with your customers, product-market fit, some of the metrics that we talk about in SaaS in terms of revenue and MRR and [unclear].  Quiet Light can help you value that business.

And the most important thing that I feel in working with my clients is: do we know the value of our business and where we fall in that range of valuations?  Anyone listening, get in touch with Jon.  See about a business valuation, no strings attached.  That provides a North Star, a guiding light, for any planning that you may want to do, whether that’s thinking about selling your company, deciding you want to grow it, or anything in between.

So as we go through this material today, the real first step is get in touch with Jon and have a conversation about where you fit in the market yourself, individually.  We’re going to talk kind of broad strokes.  Take it to the next level and get that conversation with Jon to just get a high-level overview of the value of your business today.

Yeah, I appreciate that.  What I’d love to dig into there is, beyond the valuation, just from your perspective, what was meaningful to the buyers when it came to the strategic moves that you had made?  Not necessarily for an exit purpose.  You just wanted to build a valuable business.  You wanted to build a good business.  And so I think that would be interesting to hear, from your perspective, what are some of those things that you would share with other founders who might never want to sell, but the goal is to really maximize the value of the business because it’s important for them to be working on something that is continuing to grow in value, and that they enjoy, and all those things?

07:20 The Most Common Mistakes When Preparing to Sell

It’s something that you did successfully, which I don’t think all founders do.  I think a lot of founders I talk with are very good at going from zero to one.  They’re very good at, like, building something off the ground.  But then when it comes to building a team, it starts to get a little bit more challenging.  So for somebody who’s listening that’s maybe in that inflection point, how did you kind of bridge that gap from just going very small team, building more systems, and kind of your hiring, all those things that really helped add additional value to the business as you leveled up?  I’m really curious what that looked like for you and how the buyer perceived it.

Like you said, outside of the acquiring company, how attractive I felt that the best chance, the best bet that I could make, was to run my business like a financial acquirer was going to come around and look at it and say, like, how clean are your books?  How clean is the operation?  Who’s doing what?  And so that takes… there’s some thought that goes into that.

There’s things like, what type of businesses are you focused on selling to?  Do you sell to everybody, or do you sell on a more specific type of vertical focus?  But that also starts to impact really good stuff, like we can all speak the same language as a team.  Our marketing and our product marketing is talking to the same individual.

You know, using like a grocery-store example, you could be like, we’ve got a deal for consumers.  But, like, what is a consumer?  If we just say, like, people who want to make pasta, we’ve got three pasta sauces, you know, that starts to get more specific.  I think that’s probably a little bit of a simplified example, but people running SaaS businesses, I think when we start, we’re happy to get any type of subscribers and customers that we can with a credit card.  But we find ourselves having to start to talk to all of them at once, and our marketing and our merchandising starts to get complicated.

So that focus not only impacts our customer relationships and the total addressable market, but it also does soft-skill type of things like, hey, this copy’s good.  You can talk to your marketing team and say, this is effective.  This is talking to the right audience members.  What that ultimately is, is a very clean, updated, up-to-date go-to-market strategy that says: this is who we talk to, this is what we do, and this is how we’ll win as a business.

But again, that does end up becoming valuable because you can explain where your business is headed to anyone that’s willing to listen, like an acquirer.  Internally, it gives everyone an idea of what are we doing as a company, and where are we headed?

10:15 Why Clean Financials & Operations Matter to Buyers

Now, once we’ve been able to do that, we can start to set goals, broad goals, high-level goals like we all do.  What’s our MRR growth target for the year?  What’s our churn target?  How are we going to get new customers?  But we can also start to set, downstream with other members of the team, what can they do to attack those goals?  That’s all based on how we’ve talked about we’re going to go to market, and this is how we’re going to win as a company.

Once we start to see team members succeeding in that way, we can take that as far as it goes.  You know, I think one of the challenges that founders tend to have is, like, we have a lot of stuff in our head, and it’s frustrating when people don’t have the same thing in their head.  But I think that’s unfair.  So let’s get it out of our head.  Let’s let our team succeed, and slowly work on expanding that.

To answer your question, once we’re doing all of that, it makes the business a joy to run.  We see other members of the team succeeding and doing meaningful work.  We get to give really positive feedback, like, “Good job.”  Highly powerful, highly motivating.  People know what a good job is, and we get to tell them.  Frankly, as the owners of the business, we go from being more frustrated to having more clarity and having, you know, breathing fresh air in your business.

Tell us a little bit about how a distressed founder, someone who wants to get out, can impact the value of their company.  Right?  This isn’t churn and MRR.  This is, like, very personal, emotional stuff.  But, Jon, when you see people coming to you that maybe are a little burned out, how can that impact the value, ultimately, of the business or the types of deals that they’re able to get?

Yeah.  So distressed deals, and when it’s distressed from the founder’s perspective emotionally, can still do very well if the business metrics are okay.  I think the flexibility plays a major factor into that.  When somebody’s looking at potentially selling their business and they go to market and they are just totally burnt out, it’s not an ideal place to be.  But expectation-wise, they’re open, and so I think that usually allows for more creative deal structures that help everybody win, versus talking to somebody who’s like, you know, “My business is worth 15 times ARR right now.  I’m not going to sell unless I get that number.”

And that’s totally fine if that’s where you would like to value your business, but it just makes it a lot more challenging when you’re not receptive and open and flexible to how a marketplace will view it, or other buyers who are looking at your business slightly differently.  So from my perspective, it’s just positioning it in the most accurate light that the business actually is in, and trying to be transparent.  Because if you’re not transparent upfront, typically that comes to bite you later on during the process.

That could be transparency around why you’re selling the business.  That could also be transparency around the health of the metrics and the customers and all those types of things.  Buyers are risk-averse, skeptical, and so they really want real answers to why you’re selling.  What is really going on in the business?

I think what you tapped on, though, was something I’d love to chat a little bit more about, which is strategy.

A lot of the businesses that we see are scraping together MRR from anywhere they can get it when they’re starting off, which is totally how we were as well, very horizontal in nature.  In our case, it was serving restaurants, retail, hospitality, travel.  It was a bunch of different industries, and we traveled along the way to really define who we were selling to, and for, and why, and all those types of things.

Because of that, I think it also made it a little bit more challenging to stick out as a great target.  And I think if we would have settled on one of those niches and really gone deep in solving those problems deeply, like, this is not new advice, but I think it’s just really hard advice to take, I think if we would have done that, we would have actually been more appealing to a couple of different segments of buyers.

We can talk about those different types of segments that I see.  Roughly speaking, we’re looking at individual buyers, holding companies, and private equity companies.  So I think realistically, when we were looking at the sale process, we were thinking a little naively and saying, oh, it’s going to be a strategic buyer.  It’s going to be a competitor that just buys us for a customer base that is already [unclear], and it just takes out a competitor, and then they have additional search-engine rankings because they’ve taken out a competitor.

14:30 How Market Trends Impact SaaS Valuations

But I think realistically, the most optimal buyer for our business, our B2B SaaS, was probably somebody who is a vertical-based B2B SaaS acquirer and was, you know, specifically in, let’s just say, restaurants as a category, or retail.

When I look at a lot of businesses today, if I see a ton of horizontal stuff, if I see, you know, one big customer in a random category, one-off revenue kind of things, or not a really clear avatar or clear market, that is very challenging.  And it’s hard because, from a founder’s perspective, when I talk to people, they’re like, oh, we could use this for anything.  We could serve anybody with this.  Anybody who needs a customer loyalty program, anybody who needs scheduling software, anybody who needs this.  We could serve the whole… the TAM is infinite.

And I think what’s actually more appealing to most of the buyers that I’m speaking with at the lower-middle-market and mainstream-market size is, like, no, actually niche and specificity actually matter.  Really solving a problem, and a niche problem, very well is actually more attractive because typically you’re going to see better retention in those cases.  Typically you’re going to see, you know, a better use case for the products.  So those are things that I would consider.

I know you and I talked about this offline as well.  You guys had to make a call on a big customer you had, right?  I think there was some story, some backstory, around something that you guys did positionally.  And it’s hard calls for founders to make, but I think those are the types of strategic calls that can really set you up for an exit in the next two to three years.

It sounds kind of harsh, but we’ve all done this and we say, like, we could serve anybody, or there’s this hypothetical, future-looking statement.  And the harsh comment is, like, well, if it was possible, why haven’t you done it?  And if we take that a step further, there’s kind of this idea that, what business do you think is more valuable?  The one that’s hypothetical and potential, or the one that’s actually achieving it?

I’ll talk to folks in my work, and they’ll say, “We haven’t done any marketing, and if somebody acquires us, they could just do marketing and the business would be a lot bigger.”  That kind of somewhat harsh question emerges, like, well, if that was true, why haven’t you done it?

And there is, in this particular area with bootstrapped businesses, a concern of resourcing.  I think when we find ourselves as founders saying those types of statements about, “We could,” or, “We could serve anybody,” that does make it more challenging if we put our feet in the shoes of a highly discerning financial buyer.  They want to see something that’s got a pretty clear trajectory that they can then put a financial model against, not some kind of strategic thing that we maybe have seen in the movies, or in the press, or something.

17:10 Niche vs. Horizontal SaaS Businesses – Which Sells Better?

The more that we can demonstrate it having been done and having a very clear, repeatable, almost predictable, future-looking earnings [profile] to our business, that bodes very, very well.  A clear, more vertically integrated or niched business aligns the whole business towards that.

But we sold data subscriptions, and occasionally we’d get inquiries for us to do custom work.  Early on, we’d say yes to that.  By the end, we no longer did anything.  We just sold the software subscription.

At one point we had one of these custom-data contracts that was, like, almost, I think it was half of one of our team member’s salary.  That team member, in servicing that contract, was not helping the business.  It was a totally unscalable thing.  The work that they were doing was not aligned with our strategy.

I mentioned earlier, like, it’s easier to say “good job” when something’s growing the business.  As a leader, I find it harder to say “good job” when it’s just, like, the basic stuff we do.  So this team member was doing a thankless job on something that wasn’t exciting, wasn’t helping them grow their career.

In realizing this, and seeing, well, we can replace that over time just with our MRR growth, and we could probably do it faster if we weren’t burdened by this contract, we told that customer we’re not going to renew.  The team member on our end couldn’t believe it, particularly when he said, like, yeah, you don’t even like working on this anyway.  Let’s do stuff that you’re motivated by.

We never looked back on the expense.  The income versus expenses, that looked more concerning than it was.  When you and I see businesses for sale, one-off, ad hoc revenue sources, they’re not worth anything.  No one’s buying us for that.

That’s a really acute example.  I know I’m kind of making it abstract to not be too specific, but that’s a very specific example.  Anything that’s similar to that, that helps focus on our core business, makes us more valuable.  And I said at the beginning, I want to think in terms of value versus income.  So we deferred some of that income because we knew we’d get it if we grew our business, and that’s what ended up happening.

And from a valuation perspective, it would be irrelevant at any time to just have a random contract that the buyer is not going to want to do custom-data work that they don’t even know how to do.

Just getting into some of the meat of what we’re trying to talk about today, which is around the state of the market, I’ll just share some observations I’ve seen top-level.  I’d love to hear your feedback on this too.

So when we’re talking about acquisitions kind of in that six- to eight-figure range, most of the buyers, like I mentioned before, are a lot of individuals, holding companies, and private equity companies.  And a lot of the folks that are going to be making offers on these deals are really looking at a handful of key metrics.

Lifetime value of the customer, retention plays a huge role in this.  What types of contracts do they do?  Is there a high level of customer concentration and large contracts with larger customers, or is it made up of a lot of smaller customers with lower average revenue per year?

And so the interesting thing to me is that it’s not necessarily a one-size-fits-all when it comes to valuing your business on these things.  It’s a very, hopefully, keen understanding of the market that you’re in.  What are benchmarks within that market, and does it fit within somebody’s thesis?  Does it fit within a private equity thesis?  Does it fit more within a holding-company thesis?

And by thesis, I just mean what they’re trying to get in terms of returns.  What is their timeline and horizon for those returns, and what is their strategy for growing the business over time or holding the business over time?

So those are kind of the major questions I’m asking.  I’m trying to understand the market that they sit in, who are the major, the most likely types of buyers that they’re going to see, and then what types of metrics are most important when it comes to that category and that kind of shape of a SaaS business.

Yeah, broadly speaking, I think that’s kind of what I’ve seen when it comes to businesses in this size range.  It just needs to fit within some of these categories that really align with the [unclear], you know, individuals, holding companies, private equities.  I’m just using these buckets because there could be slightly different variations of all these things.  I’m using those buckets just to give somebody who’s listening or watching an idea of what that looks like and what the buyer [looks like].

Do you find that, or do you recommend people have that broad-bucket acquirer in mind as they run their business?

I think it’s a great exercise to do.  If I was to start again, what I would do is have an executive-summary doc that I essentially write my own.  When we go to market, we have a confidential information memorandum, it’s called a CIM, and there’s an executive summary that’s anonymized.

22:45 Churn, Retention, and Customer Concentration – Key Valuation Factors

You could have this be something that’s actually not anonymized for yourself and your internal team, but it would just be a great way to identify: who are you for?  Who’s the most ideal target for buying your business?  Trying to shape it from the end in mind.

And really, all that’s going to include is: here’s the market that we serve.  Here are the kind of customers that we attract.  Here are the growth opportunities we see.  Here’s kind of the history of the business and where it’s headed.  And then those key metrics I talked about are always sprinkled in there just to help people get context around what type of a SaaS business this is.

I think it’s really nice to start with a picture of the buyer type that you could be attractive to, how they value businesses typically.  Do they usually use EBITDA multiples, or SDE multiples, or revenue multiples?  What types of opportunities might exist in the next two to three years if you do exit?

So I love to start with that end in mind.  In the past, like I said, when I was building my own, my head was down.  I didn’t really think about any of that stuff.  I was just like, well, we’re just working on this business.  I didn’t think about an exit at all.

And so I think it is important, though, if you want to think ahead and try to position the business, it’s good to reevaluate that as your business grows too.  Like, here, you know, maybe we started off as a horizontal solution, then we pivoted into this area.  Okay, let’s revise that doc.  Let’s come back to that executive summary.  What are we about?  How is this positioned for the right buyer?

That way, when people are reaching out to you inbound too, you can kind of filter out the ones that don’t make any sense.  We got a lot of inquiries from, let’s say, growth equity, where their playbook is more, you know, we’re going to take a minority investment.  Well, not all of them.  Some of them will do a minority investment, and they will try to sell the business in three to five years, and you’re going to operate that business.  You’re going to continue staying with the business for the next three to five years.  You will take some chips off the table, and then you’ll eventually sell with them.

And so I think if you’re good with that, if you want to stay on with the business under somebody else’s leadership, and you’re comfortable with that type of a scenario, then that’s fantastic.

I talk to some founders, though, and they’re like, “I would never work for anybody else.  I don’t want an investor.  I don’t want to have a committee that’s kind of making decisions for me about when I’m going to exit and what that’s going to look like.”

So I think building that executive summary can be a very personal thing.  It’s designed not to just be a catch-all for something super generic.  It’s supposed to be aligned with… I talk to other people who are like, “I don’t really care who the buyer is.  I just need to clear this amount.”  It’s like, okay, well, great.  Now let’s just talk about who’s most likely going to acquire at that amount, what type of multiples they’re using, and what are the key metrics they’re looking for?

That has got to be most people.  They have, like, the walk-away number in mind.

I approach it a little bit differently, and neither of us had an executive summary in mind.  Again, I think I would encourage folks to start the relationship with Jon, or anyone else that has access to the market, sooner than later.

My first mistake is I thought I needed to have some very focused decision on, like, am I selling or am I holding this forever?  The mistake is, you can be flexible in that.  I think what’s more important, running your company, owning this asset, is having access to better information and better guidance.

You’re an expert in your business, and there’s other people who can help be really good resources on what’s possible and what’s out there.

The second thing that we did do is we had a really good idea of our personal goals.  Like, why are we doing this?  And that can kind of even supersede, do I want to sell this thing?  Because if you say, I like working for myself, I like my pace of life, this fulfills me, I feel proud by it, those are all valuable, valid reasons to do it.

There’s the part that you touched on, like, here’s the financial goals that I have in mind.  That’s really important.  So now we’ve married why you’re doing this, which can help define what deal structure might look like and for how much, and then we look at what the business needs to do in terms of that niche focus and who our target audience is.

All three of those things, none of them are more important than the other.  They’re all equally really critical.  Without any one of them being fully fleshed out and thought out, it’s kind of like a stool.  If one of those three legs is wobbly or isn’t there, it falls down.

And so I think putting our businesses in the best possible position is: we know what we want, we know what we want from it, and we know how we want to operate it.  And then getting a sense of where we stand today provides us with the idea of, what do I need to do moving forward?

The mistake we all make is we’re going to put our heads down and work, and then one day someone’s just going to offer us 10x revenue or something.  We need to be running a clean business.

So when we think about what you’re seeing today, you had kind of talked… there’s kind of two categories.  There’s the horizontally focused business that’s making some money, and then there’s more the vertically integrated companies that you feel have more value.  Where are you seeing multiples today for that financial buyer, the more realistic kind our audience can listen to and say, okay, here’s where valuations are?  What can people think, high/low, in terms of what they’d expect?

28:00 What Buyers Look For in a SaaS Acquisition

The ballpark ranges that I usually share with people at the state of the market today are kind of… if we’re looking at the smaller end of the deal range, call it six to low seven figures, it’s primarily usually driven off of seller’s discretionary earnings, which is like owner benefits in there too, because they’re traditionally just smaller businesses and a lot of the cash flow from the business just trickles to the owners.

And so we use that as a base typically for a lot of the small businesses, and those can range from, you know, three to seven times, potentially higher than that.

As a business grows in size, then you might use something more like EBITDA and more operating costs involved.  EBITDA is traditionally just going to be lower than your SDE because you’re not adding back all these owner benefits, and so therefore the multiples are going to be slightly higher than that, you know, four-to-seven range, most likely.

The size of the businesses are also typically larger because they just have more of an operational overhead to them.

And then where you hear about revenue-based SaaS multiples, it’s usually typically dictated off of a couple things: category, and then the growth of the business.

So when you’re looking at a revenue multiple, you’re projecting future earnings.  That is the whole idea behind a revenue-based multiple.  It’s not just because it’s a software company.  It’s because investments in R&D, or the growth of the business, are kind of at a compounding state where those earnings have not yet been realized.  And so that’s the idea behind using a revenue-based multiple.

It doesn’t really make sense to use a revenue-based multiple if it’s highly profitable and not growing, because the earnings are already being realized and it’s kind of just doing its thing.

But if it’s a revenue-based situation with highly high retention rates, it doesn’t necessarily have to be verticalized, but I just tend to see better retention in those verticals that are, honestly, highly niched.  Those tend to do three to five times revenue multiples today.

Could you be above that?  Of course.  Could you be below that?  Of course.  Growth plays a large part in this, and also deal structure plays a large part in this.

Structure is not something we talk about a lot.  It’s highly variable because what goes into a multiple is not always consistent.  If you hear a multiple from me today versus you hear a multiple from what Tom told you he sold his business for, or you hear a multiple from a strategic acquirer, whatever it is, we don’t really know all the details that go into a multiple because we’re not privy to all of what’s in the purchase agreements.

The deal structure could be anything from equity rolled into the next company.  How do you value that?  That could be an earnout.  Sometimes earnouts can be another one turn of your multiple.  Is that considered part of the value of the deal?  Maybe.

What about employee agreements or employee arrangements?  If you’re paid to stay on, is that a part of the multiple?  If you’re paid a couple hundred grand a year for a few years, is that considered a part of the multiple?  Yes or no?

And so I think it’s really difficult around these conversations because you can talk to somebody and say, “I’ll only sell my business for a seven or 10x,” or whatever it is.  It’s like, okay, well, what if they make you earn it out over five years?  Would you be okay with that?

And if they’re like, “Yeah, absolutely,” then it’s like, okay, that might actually be super achievable.  If they’re like, “No, there’s got to be cash upfront.  I want to be exited in 30 days,” or whatever it is, I’m like, okay, I just don’t understand how we’re going to get there given the current metrics of the business and the expected returns of these people that have raised money that need to make money on these things.

And so it just has to make sense, I guess.  That’s why this conversation is so fluid and why multiples are so difficult, and they’re so personal to each company, because the goals of the founder, the business, and the health of the business all kind of play a factor in those things.

It’s really difficult when you get into things besides just the headline multiple versus what all went into that.  What was all included in that?

As I said, when people come to me and are looking for advice and guidance and working together, one of the most important pieces of information that they can have is: what is the range of values of my business, and where am I today?  Where do I want to go?

That sets up the discussion and the plan dramatically differently than, “I want to sell for a lot of money, and I want a deal, cash at close, walk away.”

The earlier that they can get just even a basic, general idea of valuation from you, Jon, or anyone else, I mean, there’s companies out there that do it, to help set the table for what their plan is, it gives them that chance to then say, if you don’t like what you’re told, that’s totally cool.  You can work towards it.

33:15 Market Trends – Is Now the Right Time To Sell?

And if your goals are a big number, cash at close, walk away once the ink dries, that’s your prerogative.  You can be told what you need to do to get there, and fantastic.

Where it’s much more challenging, as you just said, is someone’s like, “I want to do this in 30 days,” or they’re feeling like it’s just much less realistic, versus giving yourself that time.

So talk to Jon and get that valuation, and then talk to me and we’ll work on getting you there.

One of the things on the SDE side of things, how do you feel about kind of juicing up earnings and that strategy of starting to really reduce expenses at a given point in time?  Do you see that happening?

That’s kind of one of the questions that I’m very anti.  I don’t think that that’s a good long-term strategy, and it’s not sustainable for the owner because now we have less resources to help us with our business.  But from a value standpoint, do you see that being effective?

It can be.  It depends on the scenario.  Here’s an example.  Let’s say, for example, you are getting a certain rate from AWS with just kind of ad hoc pricing.  You know you’d do better if you did reserved [instances], and you want to sell the business.

You’re not going to receive the benefit of how that trickles down into the bottom line, in a multiple on those dollars, unless you make those changes and see those apply.

So you could say that’s kind of juicing the EBITDA, or juicing the margin, or this or that.  But I think some of those things that you could do on the margin side could actually be very useful.

Because what we could do is say, look, now that we have three months in place of a reduced cost of goods, essentially, on your hosting costs, retroactively look at the last 12 months and apply that, because for the future owner that’s going to be lower.

So there are some circumstances where I think it actually makes sense to make those operational improvements.

But if you’re just talking about slicing things that are kind of critical to the business, whether that’s team or resources or other sorts of tooling, that’s always going to be found out at some point.  So I definitely do not recommend it, and it makes a business more difficult to sell.

The investments I think that are probably even more important to make, if you can make them, and adjustments you can make, are, let’s just say, for example, you’ve been paying somebody internally and you’ve been overpaying them because you just want to have somebody always looking over this stuff, and you know that, but you haven’t made the adjustments to find somebody better or whatever it is.

Those adjustments can actually play out again in the same way.  If you make the tough calls, you make the adjustments, you work through the risk, you should be rewarded for that.

Right?  Like the risk that you’re making those adjustments.  Let’s say a customer-service rep is a friend of yours and overpaid, or whatever it is, and you don’t really need them.  But you also don’t want to go through the energy of hiring somebody new and all that kind of stuff.

If you can make those changes, and you can show them on the profit-and-loss statement, that is useful in terms of add-backs and thinking about adding value to the bottom line that could be multiplied against.

So I think it’s strategic thinking around that.  I don’t think it’s just like, “Hey, we’re going to cost-cut everything and just try to juice up our earnings.”  It’s thinking about, if you have six months, if you have some time, put some of this in place.

37:00 How to Increase Your SaaS Business Valuation

Make the adjustments to improve your costs.  Make the adjustments to lean up if you’re not using some of those things.  And then be very deliberate about explaining your thought process around those things, so that when the time comes and you have to explain it to a buyer, and they’re looking at all of your books, you can say, “Oh yeah, we switched to reserved [instances] in June, and we saw the cost cut, and now the business is 5% more gross profit than we were getting before.  But we didn’t do that initially because we weren’t even sure if we wanted to use AWS long-term,” or whatever the reasoning is.

Yeah, “juicing it,” I don’t love that.  But again, if it can be strategic and smart, I think… but you get an opportunity to explain it.

Yeah, definitely an opportunity to explain it, and not just like you’re not just trying to…

I’ve seen this actually.  Another example of this is an increase in price recently.  That’ll juice up your growth or juice up your earnings for a little bit.  But then if you look into it, you dig into it, you’re kind of like, oh, is this sustainable?  What is the churn on these cohorts looking like?

So if you’re going to make a pricing change, as a very practical example, you’re going to want to see that fleshed out over a couple of quarters, not just a couple of months, to give a buyer more confidence that that move was not just a way to juice your revenues and your earnings.

Sometimes I’ve seen that when I look at it, I’m like, we should not go to market until we see how this plays out, because buyers will be very skeptical about the retention around these things.

And now that’s also a lever that they can’t pull, so they have to kind of think about how that’s going to affect future [performance].

My expectation, and I’m not on the buy side at all, Jon, but when we think about COGS, if I saw 15% in a SaaS business, I’d view that as potentially opportunity.  Less than double digits, closer to 5%, would be where I’d try to be operating.

I think someone who’s got significant ops experience would be able to say, like, oh, I think we can cut costs on, like you said, going from hourly to reserved instances, or getting more savvy on our server costs on the COGS side of things.

Even before I go there, I might be looking at the P&L and saying, how is this thing itemized?  There’s clear room for improvement just based on best practices of the financial documents.

I think what I’m ultimately doing is leading us into a conversation about what business owners can do to be prepared today in some of their documents, operating procedures, and so on and so forth.

But if, you know, COGS is 9% of sales, like, that’s okay.  That’s good.  Or if it’s 20%, something either might be misclassified, miscategorized, or there might be room for improvement.

How do you see that, in terms of helping businesses prepare without even having to change their costs, because they now know?

Yeah, that’s a great question.  I think it really gets down to some sort of awareness around benchmarks and shopping around a little bit in terms of what you’re currently doing.

Talking to other SaaS founders, talking to folks like myself who look at profit-and-loss statements way too much, like all the time, you can kind of pick up on those if you have a sense for what other businesses are doing.

If I see something that’s like, oh, the cost of goods here is really low, or it’s abnormally high, it’s like, oh, they just don’t apply the same type of accounting practices as other places would, and those costs are hidden in a different category.

And so I think it’s good to just have an awareness of what’s going on with all those things.  If you can position those line items in a buyer’s mind in terms of opportunity or risk, whatever it looks like, I think that’s where it is important to talk to an adviser.

Because you can say, all right, the buyer is going to see this, and they’re going to actually look at this as an opportunity to reduce costs, so that’s going to bode well for them.  Or this one’s already so tight on margin, there’s no way to improve this, and it’s not growing that much, so how am I going to make the money back?

And so those types of questions are really good to go and look at your books and understand what’s really happening, and try to get some sense of where benchmarks could be for your type of SaaS business.

41:20 Final Advice For SaaS Founders Considering an Exit

Same thing goes around churn and LTV and all those things.  I have benchmarks that I kind of use in my brain and I think about, but I also give flexibility when I talk to the sellers, or the owners of these businesses.

Like, oh, it seems a little bit high from what I’ve seen, but explain it to me.  Maybe I’ve missed something, or maybe this is a case I’ve never seen before.  Can you share a little bit about why your retention looks this way?

And they might say something like, oh, well, the churn actually in our overall business is 10% or 8%, but when you actually look at, you know, the 50% of customers that are bringing in the most revenue, and the fastest-growing segment, the retention there is X%.

It’s like, oh, interesting.  If I was just looking at headline numbers, or you’re plugging that into a calculator, your valuation would be way different than if you’re breaking that out on maybe a plan-by-plan basis, or you’re having an understanding of what’s really happening there.

So I think those types of things are really important for you to do the homework on, with or without somebody, just to understand: how is this going to feel to a buyer when they look at it?

And I think getting really specific, the biggest things there are cohorts, by plan, or by new people that are coming in, understanding what the metrics look like for those different segments or avatars, or whatever it is, to explain the metrics at a finer detail than just the headline numbers.

That’s not going to apply to every business.  Sometimes you just have one plan, and maybe they’ve run a lifetime plan or something like that, and they’re like, oh, okay, this is actually not great.

But a lot of times there’s more nuance in there that is not necessarily just covered in top-line numbers from ChartMogul or ProfitWell.

Yeah, most businesses aren’t going to have the plan they started with, and they have legacy customers on it.

Yeah.  The plans that they’ve got today, there should be a lot more than that just as part of the evolution of the company.

It occurs to me, there’s kind of like a… if your best cohort, the closer that best cohort, its MRR, its percentage of business, its churn, the closer that cohort is at parity with your overall P&L, the better you’re getting in terms of that vertical integration that you and I were talking about.

We, as SaaS founders and starting to build these businesses, I think for me and what I see is we lean very heavily on our ChartMogul, or our dashboards, or Barometric dashboards, and less so on kind of the boring financial statements.

And that’s part of the maturing of the business because, in order for us to effectively communicate what we’re doing as a company, it needs to be in the common language.

44:10 How to Connect With Jon & Tom for SaaS Growth & Exit Planning

It does end up starting to create… it’s kind of like in The Matrix.  You know, when they first show it, it just looks like all the characters, but then Neo can read it, or whatever.

For business owners, you tend to actually be able to see your business through those financial statements after you’ve started to get more familiar with it, think about your business in those terms, and it impacts stuff like hiring, orgs, bonuses, what you’re doing as a business, where your opportunities are.

And lastly, on that point that you made about cohorting, that’s kind of the initial beginnings of putting together that growth plan and that go-to-market.  Rather than overall MRR, it’s like: where’s our best opportunity?

And so when I talk about being a value adviser and thinking more in terms of value than income, well, you could get $10 of MRR, or you could get $5 of MRR, but if that $5 is worth double or triple the $10, now you’d rather have the $5 than the $10, if that makes sense, because it’s just the churn on it.  It’s just more valuable to an acquirer.  It’s worth a lot more.

And I think that gets us as owners excited when we’re able to think in those terms.  But that’s not how we start our business.  We’re just looking at MRR or ARR right away versus the nuance of it.

People kind of wonder, is now a good time to sell?  So what, three to seven SDE, four to six revenue?  Should we sell now?  Should we wait?  Do you have a sense for timing the market, or when’s the best time to talk to you?

I think I’ve already said this is right now.  I would recommend everybody that’s listening to get in touch with Jon.  But how do you view it?

Yeah, there’s a couple ways I look at this.  One is, you can just say that the best time to sell is when you’re ready to sell.

You can say the best time to sell is when the public markets are high, because those tend to trickle down into private capital markets as well.  But I think there’s also just a level of a wash in terms of what your net return is going to be.

If you do that, let’s say we sell at the height of the market, then it’s like, where are you going to reinvest all that money?  You’re most likely going to diversify, and then you’re not buying at a low, you’re buying at a high.

And so I think it’s really difficult to time the market.

Right now, what I’m seeing, though, is a significant amount of buyer activity.  I can tell you that there’s a lot of people looking for deals.  I think this is partially due to just new year, new administration, lower interest-rate environment.  So overall, it feels like a great time to potentially sell the business.

But I think also, if the business health is not strong, I would probably wait.  I would try to… if you have the heart to go the distance to improve the business, I would wait until you have some of that worked out.

And we can definitely come up with a plan with that, whether that’s with Tom or with myself, or whatever it looks like, to try to help improve the business, versus just going to market when the business is heavily plateaued or declining or really struggling.

Great businesses right now are going very quickly, and there are a lot of people active on them.  The struggling-business, distressed types of things are still selling at lower multiples.

Everything in between, from the last, I would say, 12 to 18 months, has just been really challenging.  Everything kind of in the middle has just been crushed in terms of being able to move them quickly or find buyers that are willing to take the risk.

It’s a highly personal decision, but when it comes to the overall markets and the buyer activity that I’m seeing, I’d say now’s a great time to consider it if you’re in a decent spot.

And then the other time that would be really interesting to consider selling is when you’re hearing activity of other businesses in your vertical getting scooped up.  So that is paying attention to what’s happening in your industry.

A lot of times what happens, if it’s a private equity company buying your business, they will buy what’s called a platform business.  It’s, you know, call it $10 million, $20 million in ARR, and then they will buy other businesses to grow inorganically by buying their revenue and bolting it on to theirs.

And now that $10 million, $20 million ARR is worth more because they’ve acquired your revenues.  When they sell the business in three to five years, the overall value of that grows because multiples tend to grow with the size of the businesses as well.

Those opportunities can be really fantastic because somebody has raised a fund of capital that they need to spend to get a return in a very defined window of time.  So the multiples are not as… there’s a little bit more margin to play with there because people really need to get deals done.

And so I would be looking at that as a great time to sell.  “Hey, I just heard so-and-so got bought by this larger business, and we integrate with this company too, so they actually might be interested in us.  And, oh, there’s another competitor that just sold.  They might be interested.”

I think those are the ideal times, when you’re starting to feel the heat from industry players that are being acquired by private-equity-owned, private-equity-backed owners.

That, to me, is another really great time because the multiples might not always necessarily be drastically higher, because again there needs to be some sort of multiple arbitrage.  Deals are most likely going to be more flexible and faster, more certain, all the things that are super important to me when I’m thinking about which buyer do we work with.

So those would be kind of my… I know this is a really long-winded answer, but that’s kind of the way I’d be thinking about things when it comes to timing the market.

I tell people, like, we can’t, just like the stock market, we can’t time it.  And this is even less liquid.  The marketplace is much smaller, and it’s very hard to predict.

We don’t have to have a single game plan forever.  We can revisit this.

I didn’t know that when I was running my company.  I felt like it was really important to say, “I’m never going to do it,” or, “I am definitely going to put the business up.”  And I think that’s a mistake.

I think that, as a steward of your company and as a leader of it, having access to information… again, I would really urge folks to get in touch with Jon to just start that conversation and see where you are.

There’s no obligation.  That gives us, as owners, the ability to say, okay, here’s where I’m at today, and here’s the range.

What we do have the ability to control is not the time, but where we fall in that range and what we can do operationally, and how we can position ourselves to be in the best spot.

If that aligns with our goals that we’ve set, personal, financial, and the business side of things, it might be the right time, and you can make that decision and start to push much harder.

If those don’t align, you now can put together your business plan to get you there based on whatever conditions there are at the time and continue to drive forward.

No matter which decision is made, you’re still aiming to run a very sustainable, fulfilling, awesome business.

And so that’s what I think.  It can feel overwhelming.

The other thing is people talk about the deal, they talk about talking to an M&A adviser like Jon, and it’s like, “You’re going to be taken advantage of.”

Well, if you’re clear on what your table stakes are, you have the power to get what you want, and you know what you want.

I think all the little nuance in the deal side of things, the nuances that can be really overwhelming, that anxiety goes down when you know the big picture and you’ve thought through it.

That’s irrespective of market timing.  It’s really about what you want.

And ultimately, I think that’s possible.  You can say, “I want to grow past $1 million ARR to get a better deal.”  Jon can kind of touch a little bit on this, but the size of your company as one of your goals does help you think about where you might fall in terms of different bands, and revenue might be a part of it.

Well, put together what your addressable market is, what you think you can capture, and how you’re going to do that, and then go do that.

And so I think that gives people a little bit more flexibility in terms of what’s the right time.  You’ve got a plan, and you’re going to go do it.

So as people think about the state of the market today and some of the valuations that Jon talked about, what’s important is to get in touch.  Jon can walk through a little bit about what that process looks like.

Get in touch with Jon and think about the valuation and the range of high/low values for your specific business, and potential next steps.

Yeah.  So if you’re thinking about this, you want to dig in deeper, and you want me to take a look at the business, I’m happy to do so.

A lot of this is revolving around your SaaS metrics, which, if you don’t have those already in place with a tool like ChartMogul, or ProfitWell, or Barometrics, or something like that, there’s a spreadsheet that we can provide to you to use along those lines to see how things are trending overall and by cohort and plan and stuff like that.

Beyond that, it’s mostly looking at your financials and understanding how you’re running the business day to day and the market.

From there, usually it’s a 30-, 40-minute conversation.  It’s looking at your metrics and trying to understand the business as best we can, and then providing you with that high/low range and how you can improve that if that’s your goal, or if you’re ready to go to market, what that would look like.

So I’m happy to have those conversations with people.  From my perspective, it’s okay if somebody’s just curious.  That’s totally fine, to just reach out to us and get a valuation.

There’s no pressure from my perspective to ever try to… I’m never in the business of trying to convince somebody to sell their business.  Oftentimes I’ll tell people, like, no, I think you should stick with it.  Why would you sell?  The business doesn’t make any sense [to sell].

Yeah, feel free to reach out.  I’m happy to help in any way I can.

And when you get that input from Jon and you say you want to grow your business because it’s not at the numbers you were expecting, or even worse, if you don’t actually even know what to expect and you haven’t thought through your goals, get in touch with me.

I’d love to talk about how we can make the ongoing management of the business just as exciting as some of this acquisition and exit stuff.

So, thanks, everyone.