Should a healthy early-stage SaaS company care about profits when strategic or PE buyers value revenue size and growth rates so much more?

SaaS companies are mostly valued on their revenues and growth rates and not so much on profit percentages.

But profits play a huge role in helping practical SaaS founders get higher valuations when they sell their companies.

Here’s why:

All SaaS founders start to get interest from potential acquirers when their companies hit about $3M ARR. It starts with lowball financial acquirers and relationship builders.

•  If you are profitable, you can ignore all these inquiries and keep growing at the pace that makes sense for you. No distractions, no desperation.
• If you are not profitable, the clock is ticking to raise money or sell before you run out of cash. That’s 50% of CEO time talking to investors or acquirers who know you need cash and are fishing for desperate (or tired) founders here.
• Cash-profitable and breakeven SaaS businesses can keep growing. At the same multiple of revenue a SaaS business is worth TWICE as much in three years at a steady 25% growth rate. Keep growing.
• Bigger software companies garner higher multiples since there is less risk in a $20M ARR software business than a $3M ARR biz. Keep growing, but only if you aren’t desperate to raise cash or sell right now.
• When a strategic buyer comes knocking, you can have a polite conversation and entertain any offer to buy your company. And then you can tell them “No thank you” and keep on growing.

It usually takes two or three escalated offers over the course of a year or two for a strategic buyer to realize that you don’t NEED to sell, but you might WANT to sell if there is a truly premium offer.

Your valuation range is determined by your current revenue size, growth rate, and potential for predictable growth. Say 3X-7X your revenues, which is typical for a growing $5M-$10M ARR B2B SaaS company right now.

Your valuation WITHIN THAT RANGE is determined by your ability NOT to take the first offer and wait out all the potential buyers until they give you an offer you can’t refuse.

Earning some cash profit allows SaaS founders to politely wait out interested buyers and keep growing steadily, making their company more valuable.

Or wait it out and sell when markets get hot again.

You might even take some money off the table now as profit distributions, so you aren’t started for the cash that potential buyers wave in front of you.

You can’t negotiate much when you are burning cash and can’t raise more funding. Buyers smell desperation and will take advantage of it.

Profits give founders the optionality and power to win their game on their terms.

I have heard this from 50+ SaaS founders I interviewed on the Practical Founders Podcast and from countless other practical founders I know.

#practicalfounders