SaaS Valuation Demystified: Tips for Buyers and Sellers in the Market

Recently, we had a conversation with a great SBA lender* about #SaaS valuation. He was working hard to educate his underwriting team that traditional SBA valuation metrics were essentially inapplicable to SaaS.

In certain verticals where PE, VC, family-office, search-fund, and strategic acquisitions / investments are common, the market for business transfers tends to trade much higher than traditional SBA credit analysis will support. The reasons for that can be, as in the case of SaaS businesses, huge total addressable markets, opportunities for explosive growth, and high-quality recurring revenue, among other factors. Those factors have attracted the buyers mentioned above with cash and revolving credit facilities, and individual purchasers backed by traditional-thinking SBA lenders won't be able to compete.

With opportunities for SBA pari passu financing getting to $10M in available funding, more individual buyers are now searching at the bottom of the lower middle market space.

If you're one of these buyers, you need to ask your lender whether they've done transactions in the space or if they're willing to learn about it and go to bat for your deal. If you need some help, Matthias Smith is one of the best in the business at matching deals to lenders.

If you're a seller, you need to consider the buyer's funding position and the expected sources of those funds when weighing that buyer's ability to close vs those with deeper pockets. Unfortunately, funding does not always materialize from lenders or investors as initially assured by the buyer or a lender's pre-qualification letter.

In the coming weeks, we'll talk more about #SaaS valuation specifics.

*Masking the lender as this is an active transaction.