Micro-SaaS Valuation & Metrics: Know Your Micro-SaaS Startup Worth in 2024

Valuing a micro-SaaS business might seem complex, but with the right approach, it becomes manageable. Here’s a simplified guide to help you understand how to determine the worth of your micro-SaaS startup and identify the key metrics buyers consider.

How to Value a Micro-SaaS Business

There are three primary methods for valuing a micro-SaaS company based on its earnings: SDE, EBITDA, and revenue. Each method considers the business’s profitability and maturity. For most micro-SaaS startups, the SDE model is the most suitable due to the smaller scale and often limited management team.

Key Terms:

• Revenue: The total income from sales.
• COGS: Cost of Goods Sold, or the direct costs of producing goods sold by a company.
• OPEX: Operating expenditures, such as rent and software expenses.
• Owner’s Wages: The salary paid to the business owner.

SDE Valuation

Seller Discretionary Earnings (SDE) represents the profit the owner makes after deducting COGS and operating expenses, excluding the owner’s wages. This is the preferred method for valuing small software businesses under $5 million.

Formula:

SDE = (Revenue + Owner Compensation) – (COGS + Operating Expenses)

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) includes the owner’s wages and is used to measure a company’s financial performance. This method is typically applied to larger companies earning over $5 million.

Formula:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Revenue Model

Micro-SaaS businesses often use the Annual Recurring Revenue (ARR) model. Despite high initial investments in growth, ARR and customer retention can improve profitability over time. Buyers are particularly interested in Monthly Recurring Revenue (MRR) as it provides a more predictable measure of a company’s health.

Finding Your Micro-SaaS Valuation Multiple

Formula:

Listing Price = Annual Net Profit x Multiple

Here are few general overviews for evaluating micro-startups:

• Pre-revenue startups: $500 – $1,500
• Startups with up to $500 in ARR: $2,000 – $3,000
• Startups from $500 to $1,000 in ARR: $3,000 – $5,000
• Startups with over $1,000 in ARR: 3x to 5x ARR

Key Metrics for Valuing Micro-SaaS Startups

1. Churn Rate

Formula:

Churn Rate = (Canceled Customers / Total Customers at Beginning of Period) x 100

Lower churn rates indicate higher customer satisfaction and loyalty.

2. Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

Formula:

CAC = (Marketing Cost + Sales Cost) / Number of Customer

LTV/CAC Ratio: Aiming for a ratio of 3 indicates profitability and growth potential.

3. Monthly Recurring Revenue (MRR) vs. Annual Recurring Revenue (ARR)

MRR provides a more immediate view of a business’s health, while ARR offers a long-term perspective.

Other Factors Impacting Valuation

• Founder Involvement – Businesses that can operate with minimal founder involvement are more attractive to buyers, especially non-technical ones.
• Customer Acquisition Channels – Effective and profitable channels like SEO and content marketing are crucial for sustainable growth.
• Year-over-Year (YoY) Growth – Buyers prefer businesses with a growth rate of 10-20% over the past year.
• Scalability – Future growth plans and potential for product or market expansion impact valuation.
• Competition – A unique value proposition in a competitive market enhances attractiveness.
• Market Saturation – Operating in a less saturated market or having a unique edge in a crowded market can positively influence valuation.
• Retention Rates – High customer retention rates signal a stable and loyal customer base, making the business more appealing.
• Business Age – Older businesses are generally more trusted, though even younger businesses can be valuable if they show strong market fit.
• Revenue Diversity – Multiple revenue streams reduce risk and can increase valuation multiples.
• Technology Stack – A modern and scalable technology stack indicates lower future development costs and higher scalability.
• Brand Reputation – A strong brand reputation can add significant value, attracting buyers looking for well-established names.

Conclusion

Understanding your micro-SaaS startup’s valuation is crucial for a successful exit. By focusing on key metrics like MRR, churn rate, CAC, and LTV, and optimizing your business’s performance, you can attract the right buyers and achieve a higher valuation. Ensure your startup is profitable, scalable, and has minimal founder dependency.

Prepare your startup with comprehensive documentation, a solid growth plan, and a strong customer base. List your business on our marketplace for free and connect with interested buyers, ensuring a smooth and profitable transition.