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5 Drivers of SaaS Valuation #5 – CUSTOMER ACQUISITION COSTS

September 18, 2013

How much money will it take to grow?

The SaaS Capital team has looked at the financials of literally hundreds of businesses over the years. Almost all these businesses were either SaaS companies or had a very similar recurring revenue business model. Drawing from these experiences, we have put together a list of value drivers every seller should pay attention to as they go about preparing for the sale of their company or their company’s stock (an equity raise). Other nuances of your business will undoubtedly impact valuation, but theses are the broad-based value drivers.

Listed in order of importance, they are:

  1. Growth
  2. Addressable Market Size
  3. Customer Retention
  4. Gross Margins
  5. Customer Acquisition Costs

In this final post in our series of blog posts we are going to take a deeper look at CUSTOMER ACQUISITION COSTS as a factor in company valuation.

Both investors and strategic buyers are typically looking to continue growing a SaaS business by deploying more capital in sales and marketing. How efficient the business is at converting that spending into new customers is highly relevant to both projected future cash flows at maturity, and also the amount of capital it will take to grow.

High customer acquisition cost (CAC) businesses require more capital to grow and, thereby, diminish overall returns whether the buyer is a VC or a corporation.

Your “CAC Ratio” is also relevant to your ultimate valuation because it compares customer acquisition cost to the lifetime value of a customer. The better that ratio, the higher profitability will be over time.

A related metric to CAC is the “average length of sale”. Buyers and investors want to understand this metric because it can significantly impact the timing of future cash flows and quarterly earnings. The shorter the sales cycle the faster the payback. Short sales cycles also reduce risk because long sales cycle business can be off-track for several quarters or years before an issue becomes apparent.

To learn more, download our white paper “What’s Your SaaS Company Worth?” for an in-depth look at all five valuation drivers and other considerations when conducting a valuation exercise.

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