Updated: Sep 7
Today's video post is by Mike Blake (CFA, ASA, ABAR, BCA) of Brady Ware & Company. Mike specialises in the valuation of intellectual property-driven firms, such as software firms, aerospace firms, and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. Additionally, he is a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Common mistakes in SaaS valuation include:
Failing to correctly capture growth. A mistake failing to correctly capture growth would look like using a long term growth rate that either is unsustainable because it's too high or is undervaluing the company because it's too low.
Assuming that pre revenue companies have no value. When you assume that pre revenue means no value, you're ignoring the venture capital markets, which are routinely valuing SaaS companies at multimillion dollar valuations every day, often years before they achieve sustainable revenue.
Incorporating the value of sweat equity. Frequently sweat equity is believed to have some value, but in reality investors don't care about sweat equity. Sweat equity is simply whatever was invested to make the company valuable at all and to make it attractive to investors. But that's something that is rarely paid for by a third party buyer.
Failing to properly capture the impact of capital structure. I frequently see valuations failing to capture the impact of capital structure because we're often taught that securities such as preferred stock are basically debt. But now we understand them to be much more complex and sophisticated than that. In fact, they're hybrid securities and therefore more sophisticated techniques must be used in order to value them properly.
Knowing what KPIs actually matter. You can tell when the wrong KPIs are being used in the valuation because they're not relevant to the company at hand. Many practitioners who are used to valuing more conventional companies will use conventional KPIs. But those KPIs don't apply because the nature of the SaaS business model model is so fundamentally different.
Interested to know more? Watch the recording of the webinar: Sassy Valuations - How to Confidently Approach the Valuation of Software Enabled Businesses held live by the Business Valuation Institute UK (BVIUK) on April 27.