Here's Why SaaS Businesses Are A Steal At 50x.

SaaS businesses have the highest multiple of any small online business.

I believe this causes many buyers to skim right be them — but they’re still undervalued. Let me explain.

Their valuation is often not much higher than other online business models, despite offering significantly longer customer lifespans, and subsequently less risk.

For instance, I paid a 40x monthly multiple for an online course business with an average customer subscription length of 6 months. Yet, there are SaaS businesses with slightly higher valuations—like the Digital Music Distribution SaaS included in the 8/26 Deals at a 47x multiple—where customers are likely to stick around for at least 12 months, if not longer.

This discrepancy is striking. The SaaS business has double the customer lifespan but isn't even close to twice the valuation multiple.

In many cases, with SaaS businesses, you can simply increase the price and rely on the stickiness of the customer base. Hell, some acquisition entrepreneurs even play a strategy of acquiring SaaS businesses and quickly raising prices — doing nothing else — banking on customer loyalty.

Take Constellation Software, for example. They're the OG of SaaS acquisitions—a publicly traded company with a market cap of $90 billion that has acquired thousands of vertical market SaaS companies (think restaurant management software) since the mid-'90s. They've seen incredible success, and their story is worth a Google search to explore their total stock return and business model.

What's particularly relevant to SaaS business acquisitions is how they operate post-acquisition. The SaaS companies they acquire typically don't receive much further investment in development or marketing. No big revamp of the software or marketing genius, instead, they focus on servicing their existing customer base, effectively ‘checking out’ while the cash continues to flow in.

Next to time you see that valuation multiple of 50x for a SaaS next to a 40x ecom business, don’t pinch your pennies.

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My thoughts for the evening,

Corey