I do have to say, I was somewhat surprised by the low multiple on the valuation, but perhaps that's just what the range is for a business of this nature. We're spoiled in the world of software and recurring revenue.
What about the tax implications of the sale. Have you figured out how much of the sale you'll be able to put in your pocket?
>I do have to say, I was somewhat surprised by the low multiple on the valuation, but perhaps that's just what the range is for a business of this nature. We're spoiled in the world of software and recurring revenue.
Yeah, from what I've heard, SaaS businesses sell for a much higher multiple, often selling as a multiple of revenue rather than earnings.
The other thing that's really reduced valuations is interest rates. When interest rates were <1%, private equity was bidding up prices of businesses because it was a decent place to park money, but now that you can get 5.3% from a money market, the additional return from buying a business isn't worth the risk.
>What about the tax implications of the sale. Have you figured out how much of the sale you'll be able to put in your pocket?
Still working out the exact figure with my accountant. His expectation was that I'll keep a pretty large percentage after taxes because of Section 174. I had a large amount of expenses each year in software development from overseas contractors, and with Section 174 changes that went into effect in 2022, I had to amortize them over 15 years.[0] But with the liquidation of the company, I can count those expenses immediately, and they offset the income from the sale. So Section 174 is still a bad deal for software founders, but at least when you liquidate the company, you don't have to wait out the full 15 years of amortized expenses.
> Yeah, from what I've heard, SaaS businesses sell for a much higher multiple, often selling as a multiple of revenue rather than earnings.
Adding some color as I have been through the process of selling a SaaS. Based on what you have written, at that stage of development, multiple on SDE is most common. 2.4x is on the low side for growing SaaS businesses, but this business is hardware with real COGS so the economics and buyers will be different. We also don't know the growth rate of the business, which is important in assigning a multiple.
Additionally, full cash payment at closing is a reasonable ask but can lower the overall sale price. (I don't know if it did in this case.)
Again, congratulations in taking this big step on your journey!
Valuation also depends heavily on components of a particular business, so it's not useful to just use one range. Does the business require the owner to run, or is a management team in place? Does it generate its revenue from 1,000 paying customers or 25? What is churn like? How fast is it growing? And bigger companies tend to have less risk in general than very small companies. FEI guides to a range of 7x - 10x for SaaS > $2m valuation (yes, this is somewhat recursive). The high end of that range is about a third the multiple Microsoft gets, but then again these are small businesses without Microsoft's competitive moats.
FE International[1] and Acquire.com[2] routinely publish excellent valuation guides for SaaS companies. I highly recommend to anyone looking to build or buy a SaaS.
1 - https://feinternational.com/blog/saas-metrics-value-saas-bus...
2 - https://blog.acquire.com/acquire-biannual-acquisition-multip...