One important question I often get asked by my subscribers (especially sellers) is: how do you value a micro-SaaS business? Receiving offers for your startup is all fun, but understanding how micro-SaaS business valuation works is crucial for selling your business at the best price possible. Valuing a micro-SaaS startup isn’t so different from finding the valuation of a SaaS startup. However, there are subtle differences as we’ll observe in this article.

Whether you’re a buyer or seller, it’s imperative you know how to evaluate a micro-SaaS company to guarantee you’re getting a good deal. 

The calculation may be a bit tricky, but I’ve explained it in detail based on my experience overseeing multiple acquisitions. In this article, I’ve addressed several valuation methods to help you choose the best for your micro-SaaS startup. You’ll also learn how to find your micro-SaaS revenue multiple to exit your business for a deserving amount and all the key metrics you need to pay attention to when buying/selling a micro-SaaS startup.

So without further ado, let’s dive in.

READ: How to Evaluate a Newsletter’s Worth

Micro-SaaS Valuation Methods

Valuing a Micro SaaS business is like a delicate dance with three partners; financials, market conditions, and growth potential. A good relationship is needed in this dance; otherwise, everyone would be stepping on each other’s toes. 

The point is that it takes a deep understanding of all these elements to arrive at a fair and accurate valuation. Whether you're a seller looking to cash out or a buyer on the hunt for the next big thing, getting the numbers right is crucial to avoid any future regrets.

There are four main methods for determining a micro-saas company’s worth based on its earnings: Seller Discretionary Earnings (SDE), Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), Annual Recurring Revenue (ARR) and revenue multiples. 

Let's look at them in more detail. 

The Berkus method

The Berkus method of finding micro-SaaS startup valuation is designed for pre-revenue startups - micro-SaaS startups that are yet to get any paying customers. As opposed to valuing businesses based on their financial status and projection, the Berkus approach focuses on five risk factors;

• Sound idea: how great the micro-SaaS idea is
• Quality management team: how great the team is at execution
• Prototype: the product’s quality in attracting customers
• Strategic relationships: this refers to partnerships and customer relationships
• Product rollout or sales: showing promise of profitability

The problem with this valuation method is that it assigns a maximum value of $500k to each factor without considering other factors like location, etc. Also, assigning a value is subjective rather than quantitative, making it difficult for both buyer and seller to agree on a price. 

Now let’s get into more quantitative micro-SaaS valuation methods.

READ: 5 Best Micro-SaaS Marketplaces

Seller Discretionary Earnings (SDE)

Seller discretionary earnings is one of the best valuation methods for small businesses, not just micro-SaaS startups. It’s a simple way to value your micro-startup by taking into account your pre-tax profit and the salary you pay yourself before deducting the company’s expenses. The remaining value is your SDE.

The formula for calculating SDE is:

SDE = (Revenue + Owner Compensation) - (Cost of Goods Sold + Operating Expenses)

Micro-SaaS company value = SDE x valuation multiple

This valuation model is typically used for small software businesses run by solopreneurs valued at under $5,000,000.

EBITDA 

EBITDA is like the superhero of valuations. It strips away all the non-essentials, leaving you with a clear picture of your business's true profitability. This method is better suited for larger micro-SaaS startups with more employees and complex financials. It stands for earnings before interest, taxes, depreciation, and amortization. 

EBITDA factors in the owner’s wages and is used to measure a company’s financial performance/profitability to determine the strength of its cash flow. The formula for EBITDA is:

EBITDA = Earnings + Interest + Taxes + Depreciation + Amortization

After finding your EBITDA, you then multiply it with your company’s multiple (more on that in a bit). The formula for calculating micro-SaaS valuation is therefore;

Micro-SaaS startup valuation = EBITDA x valuation multiple

EBITDA is typically used to value companies earning over $5 million as it puts more factors into consideration.

Revenue valuation

A much simpler way of calculating a micro-SaaS startup’s valuation is by using the revenue method. Here, you simply multiply the company’s annual recurring revenue (ARR) or monthly recurring revenue (MRR) by the multiplier to find the valuation. The good thing about this model is that with good customer retention, the company’s profit can improve over time, resulting in a higher valuation. On the other hand, the valuation is based on the company’s growth, so buyers may not be willing to pay an acceptable price for it if your micro-SaaS isn’t growing.

The formula for the revenue-based valuation model is;

Valuation = revenue x multiple

How to Find Your Micro-Saas Valuation Multiples

Now that we know the different valuation methods, the next step is to find the multiplier which will give us our listing price. A couple of factors determine the micro-SaaS multiple; industry, finances, customer acquisition, and operations.

Finances: the questions to be asked regarding the micro-SaaS’s finances include the age of the business, income stability, owner’s influence, and the monthly and annual revenue trend over the past 1 - 3 years.

Customer acquisition: things to consider regarding the customer base include target market, customer acquisition channels, customer acquisition cost (CAC), customer lifetime value, churn rate, search rankings and traffic trends. Other things you may want to consider are if the site has been affected by a recent Google algorithm.

Industry: things to consider about an industry are the level of competition, the barrier to entry, the financial strength of the competition, and whether the industry growing or declining.

Operations: things to consider: the technical know-how required to run the micro-SaaS business, the tech stack, what percentage of the business can be run without the founder, and the number of staff the business employs.

Based on these factors, micro-SaaS businesses' multiplier typically ranges from 3x to 15x the business’s revenue or earnings (when going the EBITDA route). This depends on the stage of the company, market conditions, etc. When calculating the SDE, micro-SaaS multiple could range from 3x to 10x the SDE value.

It can be somewhat complicated to arrive at a figure, so you could use the following overview to generally evaluate micro-startups;

1. Pre-revenue micro-businesses (zero revenue): $500 - $1,500
2. Micro-businesses with up to $500 in ARR: $2,000 - $3,000
3. Micro-startups from $500 to $1,000 in ARR: $3,000 - $5,000
4. Micro-startups from $1,000 in ARR: 3x ARR to 5x ARR

While companies can be valued at 3x to 15x their annual revenue, getting the multiple is not as straightforward as outlined above. The multiple reflects the long-term value of a startup, and it can be gotten based on some factors. Let’s explore them.

READ: Factors Responsible for Micro-SaaS Startup Success

What Are the Key Micro-SaaS Metrics For Valuing Micro-SaaS Startups?

There are a lot of metrics micro-SaaS buyers pay attention to when assessing the value of a micro-SaaS startup. Here are some of the most important ones:

Annual Recurring Revenue (ARR) vs Monthly Recurring Revenue (MRR)

ARR is the expected annual revenue that a company can earn from selling subscriptions to its customers. On the other hand, MRR refers to the monthly revenue a company makes monthly. These are key indicators of a business's financial health and stability, providing insights into customer retention and revenue growth. While selling annual subscription plans brings in more money in a shorter timeframe, micro-businesses prioritizing making money from selling monthly subscriptions tend to have a higher valuation. This is because revenue from selling annual plans is unpredictable.

Churn

The churn rate is one of the most important metrics buyers look out for when acquiring a micro-SaaS as it can be used to predict a company’s monthly revenue and profitability.

It’s one of the most important indicators of customer satisfaction and company valuation. The churn rate measures the percentage of customers your startup loses over a certain period; could be within a month or year. Therefore, the lower your churn rate, the more loyal your customers are, and the higher your software business’s valuation.

Churn rate = (Canceled customers / total customers at the beginning of the year) x 100

Customers will always churn: the most important thing is to get a predictable influx of customers. To have a high micro-SaaS startup valuation, your churn rate should be less than 30%; however, if you run a self-service micro-SaaS (where customers troubleshoot problems by themselves rather than with the help of salespeople), it could get up to 60%.

Net Revenue Retention (NRR)

NRR for software companies measure the percentage of recurring revenue retained from existing customers after accounting for upgrades, downgrades, and churn. It highlights customer satisfaction and loyalty, which are critical for long-term success and a higher micro-SaaS startup valuation.

For example, A micro-SaaS company with an NRR of 120% indicates that it is retaining more revenue from existing customers than it is losing due to churn, demonstrating strong customer loyalty.

Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV)

Customer acquisition cost is the average cost spent in acquiring a new customer while customer lifetime value is the revenue contributed by a customer to a business during their time as a customer. Both metrics are big indicators of a business’s profitability.

CAC = (marketing cost + sales cost) ÷ number of customers

For example, if a company spends $100,000 to acquire 100 customers, the CAC is $1,000. This indicates the company’s spending $1,000 to acquire each new customer. 

CLTV = customer value x average customer lifespan

Customer value = average purchase value x average number of purchases

An LTV of $3,000 means that the average customer is worth $3,000 in revenue over their lifetime. These provide a benchmark for the company to evaluate the effectiveness of its marketing and sales strategies.

The lower your CAC and the higher the LTV, the higher your micro-SaaS startup’s valuation. To measure your startup’s profitability, we need to get the LTV/CAC ratio by dividing the LTV by the CAC. 

Let's say your LTV is $1,000 while your CAC is $500. That gives us;

Ratio = LTV / CAC = 1000 / 500 = 2

A good value to aim for is 3 as it shows that your startup is making a profit and growing while being in a good position should your CAC rise.

Total Addressable Market (TAM)

TAM helps estimate the potential revenue a micro-SaaS company can generate if it captures 100% of its market (assuming it’s got no competition). It provides insight into the company's growth potential and scalability.

For example, a micro-SaaS company with a TAM of $1 million indicates that it has the potential to generate significant revenue if it can capture a larger share of its market.

Gross margins

Gross margin represents the percentage of revenue left after deducting all costs and expenses, indicating business profitability. Micro-SaaS businesses with higher gross margins are more profitable and tend to have higher valuations.

For example, a micro-SaaS company with a gross margin of 70% indicates that it’s retaining a significant portion of its revenue after expenses. Buyers will be more interested in this kind of business.

READ: Best AI Micro-SaaS Startup Ideas for Solopreneurs

Other Factors that Impact Micro-Saas Startup Valuation 

In finding your micro-SaaS business’ valuation, you may want to consider these secondary factors as well.

Founder involvement

As a solopreneur micro-SaaS founder, you’re most likely in charge of your startup’s marketing, customer service, content, and maybe design and programming. If you’re heavily involved in your business this way, this may put off some buyers. 

30% of the buyers on our marketplace have no technical background. This means that they will prefer to buy businesses with other people knowledgeable on how to run the business rather than just the founder. This is why we made it mandatory for startup founders to support buyers for 1 month for free. 

To make your startup more attractive for acquisition, set up a system where the business can run with little to none of your input. So your involvement may determine how buyers evaluate your business.

Year-over-Year (YoY) growth

The higher your micro-SaaS's YoY growth rate, the higher your SaaS valuation multiple is likely to be.  When buyers evaluate micro-startups, they expect to see decent growth rates ranging from 10 to 20% to consider a company valuable. 

Although there is no one-size-fits-all answer to what a good YoY growth rate is as it depends on the stage and industry of your micro-saas; however, as a general rule of thumb, a YoY growth rate of 30% or more is considered strong for micro-SaaS startups. 

This means that if your micro-SaaS generated $100,000 in revenue last year and $130,000 this year, your YoY growth rate of 30% would be viewed favorably by interested buyers.

READ: Buyer Due Diligence Checklist for Micro-businesses

Customer Acquisition Channels

The customer acquisition channel is very important as it’s what drives growth. Some of the most effective marketing strategies include search engine optimization (SEO), organic content marketing, social media marketing, LinkedIn ads, Facebook ads, affiliate programs, etc. 

You typically want to implement around two channels at least - organic content, SEO, and social media content marketing on LinkedIn and Twitter seem to be the top channels for micro-SaaS founders. The more and cheaper the channels are, the higher your business’s valuation.

Scalability

What growth plans are on the horizon? Have you got plans to reduce churn by releasing a new product or feature to attract new customers or retain existing ones? Are there opportunities to improve upon the existing product or acquisition channel? These factors can impact how buyers evaluate your micro-SaaS startup.

Competition level

What do you bring to the table? How’s your solution different from the competition? Why do customers choose you ahead of the competition? How best does your product or service cater to the needs of your customers? How funded are your competitors and what chance do you stand? These are some of the questions customers will be asking to ascertain your micro-business’s value. 

Conducting a SWOT analysis is a great tool for finding the unique value of your service/product. You can bet that the more unique your solution, the higher the price buyers will be willing to pay for it.

READ: How to Build A Profitable Micro-SaaS Product

Saturation

While a saturated market indicates a flourishing market, swimming in these waters can affect your micro-SaaS startup’s valuation: buyers may be looking to steer clear of such markets. However, if you’re uniquely positioned with a solid value proposition and able to attract a sizeable market share, buyers could give your business take a chance on you even when you’re competing against VC-backed startups.

Age of the business

Generally, a business’ age affects its valuation as buyers tend to prefer companies that have been around for a minimum of 2 years. However, age isn’t a big factor as a micro-SaaS doesn’t need to be 2 years old or more to prove it’s a product-market fit. 

How to Increase Your Micro-SaaS Valuation Multiplier

As a micro-SaaS entrepreneur, you're likely eager to maximize your business's value. One crucial aspect of achieving this is increasing your valuation multiplier. Let's explore four strategies to help you boost your valuation multiplier and get more value for your hard work.

Optimize your pricing

Pricing is a delicate balance between revenue and customer satisfaction. To increase your valuation multiplier, you need to strike the perfect balance. Here are some tips to help you optimize your pricing:

1. Value-based pricing: Focus on the value your product or service provides to customers. This approach ensures you're charging for the benefits your customers receive, rather than just the features.
2. Tiered pricing: Offer different tiers of service to cater to various customer segments. This allows you to charge more for premium features and services while providing a competitive entry-level option.
3. Dynamic pricing: Adjust your pricing based on market conditions, customer behavior, and other factors. This helps you stay competitive and maximize revenue.

Nail your marketing

A solid marketing strategy is essential for attracting and retaining customers. Here are some tips to help you:

1. Positioning: Your position is what will make you stand out in a crowded market. Find out the top reasons why your customers choose your solution and use that in your messaging.
2. Content marketing: Create high-quality, relevant, and valuable content to attract and engage your target audience.
3. Influencer marketing: Partner with influencers in your industry to reach new audiences and build credibility.
4. Paid advertising: Use targeted paid advertising to reach potential customers and drive conversions.

READ: How to Buy A Micro-SaaS Business

Improve your customer experience

Customer experience is critical for retaining customers and driving word-of-mouth referrals. Here is how you can achieve that:

1. Personalized support: Provide personalized support to each customer, addressing their unique needs and concerns.
2. Streamlined onboarding: Make it easy for new customers to get started with your product or service by providing a seamless onboarding process.
3. Regular updates and feedback: Keep customers informed about updates and improvements, and solicit feedback to continually improve your product or service.

Make your micro-SaaS sellable

Remember when we earlier mentioned that your involvement in your business as a founder plays a role in determining its valuation? This is why you need to consider documenting and standardizing your processes to help ensure knowledge is transferable and that there’s consistency and efficiency across your business. 

Here’s how to have a seamless process:

1. Create a knowledge base: Document your processes and knowledge (source code, SOPs, etc.) in a centralized knowledge base, making it easy for team members (if you have any) or the buyer to access and follow through.
2. Outsource: If you plan on selling your business, you should consider outsourcing some tasks, so that some parts of the business can run without you. 
3. Standardize workflows: Establish standardized workflows for common tasks and processes, ensuring consistency and reducing errors.
4. Automate repetitive tasks: Automate repetitive tasks and processes to free up time for more strategic and creative work.

Conclusion

After knowing your startup’s valuation, it’s time to list your business on our marketplace - it’s free - there are lots of interested buyers. And if you’re interested in getting profitable micro-startups, sign up and we’ll send you a weekly list of new businesses for sale.

FAQs

What is the Rule of 40 in SaaS?

The Rule of 40 is a financial framework that balances revenue growth versus profit margins. It adds a company's revenue growth rate to its profit margin to determine if the company is operating sustainably. The goal is to achieve a combined growth rate and profit margin of 40% or more. This metric helps SaaS companies evaluate their financial health and make strategic decisions about growth and profitability.

What is the average EBITDA margin for micro-SaaS?

The average EBITDA margin for micro-SaaS startups is around 29%. This is based on the average EBITDA margin of publicly traded SaaS companies on the Nasdaq, which has hovered around 30% in recent years.

What are some creative ways to value pre-revenue micro-SaaS startups?

Creative methods include the Berkus Method, which caps valuations at $2M pre-revenue and $2.5M post-revenue, and the Cost-to-duplicate Method, which appraises the value of a startup's physical assets and intellectual property.