That’s a great question and one that’s not easily answered because there are so many variables. But this article should give you a good overview and we can always give you a custom valuation for your business. Get your instant valuation here.
There are a number of factors that affect the valuation of a business. We’ll explain each one below starting from the main categories and drilling down from there so you can figure out where your business fits in.
Also, keep in mind that everything in this article relates to financial buyers. All buyers are financial buyers, meaning they make offers based on a multiple of either gross revenue or profits.
Sometimes, though, a buyer sees a benefit to acquiring a business beyond just the number. For example, they may be in a parallel or ancillary industry to yours and have an existing customer base they can immediately market your business’s products and services to. Or they may already be thinking of building your software and see a greater benefit to buying it instead. Sometimes, they might be a supplier to businesses like yours and want to move directly into retail.
In any of these cases, they become a strategic buyer and may be willing to pay more than what a purely financial buyer would, or what they would for a business they have no strategic interest in. So if you go through this article and think your business should be worth more, then you’re looking for a strategic acquirer. This is something we can also help with, but only some businesses have strategic acquisition potential. Please get in touch if you want to discuss this possibility.
First, the type of business you own plays a big role in determining its valuation.
- Content sites (blogs, etc.) generally get the lowest multiples, ranging from 1 – 3.5x annual net profits on average.
- Ecommerce / FBA sites get slightly higher multiples, ranging from 2 – 4x annual net profits on average.
- Digital Agencies trade slightly higher still, with multiples ranging from 3 – 5x annual net profits on average.
- And SaaS business get the highest multiples, ranging from either 4 – 6x annual net profits on average, 1 – 3x ARR (annual recurring revenue) on businesses doing under $3m ARR, and 3 – 8x ARR for businesses between $3m – $10m ARR, depending on other factors.
A number of other factors determine where specific businesses fall inside this range, or if they fall outside it on either side.
The next factor affecting valuation is the size of the business in terms of revenue and profit. Smaller businesses get multiples at the lower end of the ranges above, and bigger businesses skew to the upper end of the range.
Generally, we see multiples increases as businesses move through these ranges of annual net profits:
- Under $250K
- $250K – $500K
- $500K – $1m
- $1m – $3m
- $3m – $10m
The same size ranges of ARR apply to SaaS business multiples based on ARR.
Above $10m per year in either net profits or ARR, puts businesses in a different multiples category. Once you get to this size, you become a target for institutional buyers and the multiples can easily be 10x or higher.
As should be expected faster growing businesses get higher multiples than businesses that are flat or declining. In fact, a declining business most likely falls below the ranges listed above, if it’s sellable at all.
In general, a business should be both growing (in terms of revenue year over year) and profitable to be highly desirable and get the highest multiple. The exception to this is a fast-growing SaaS. It’s acceptable for a SaaS that’s growing more than 40% YoY to have no profit, and that’s when they trade a multiple of ARR instead.
A number of other factors contribute to a smaller degree to both the valuation and the sellability of a business. The following impact a case by case to some degree:
- Barrier to entry
- Traffic sources
You can get your Exit Score and a full Exit Report here. It talks about all the factors and how to position yourself for the best results.
We get this question all the time, so we thought it made sense to write an article about it. We hope you’ve found it useful, and if you’re serious about selling your business and want to know what it’s worth, the best thing to do is say hello.