SaaS Business Value Calculator

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More About Purchase Price

This is the most straight forward of the fields on the form. Just enter what you want to pay for the site or what you think you can sell it for.

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More About Risk Adjustment

We feel that this is the most important element to focus on. In its most basic sense, the risk factor just adds onto the discount rate. So, if you enter a 20% risk factor and you have the discount rate set at 10%, you have a combined discounted cash flow of 30%.

Most financial analysis formulas don't include a risk factor but we feel it's imperative here. There are inherent risks in purchasing a website. If you can accurately identify those risks and the percentage chance that everything could go horribly wrong, you'll have a competitive advantage. To put another way, he who most accurately identifies the risk, wins.

One of the most common questions we get asked is "what happens if the site loses all of its Google rankings"? Well, if you can calculate the chance of that happening, you can just factor it in. Different search terms are more competitive than others. If the site you are looking at is about insurance, it should have a higher number in the risk factor than one about dalmatian puppies because there are so many more sites going after insurance terms.

How old is the site? How many terms does the site rank for? How many inbound links does the site currently have? These are all questions you have to ask yourself when determining the risk. For us, we see sites that are low risk where we would recommend a 10% risk factor and we see sites that are high risk and we’d want you to put a number as high as 50%.

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More About Discount Rate

This is your cost of capital. If you are borrowing money, it's the interest rate you will be paying. If you are using cash in the bank, it's the minimum return that you would expect on any other investment. In other words, if you think you could earn 10% playing the stock market and you will be using your own cash, just enter 10%.

The reason it's called a discount rate, rather than an interest rate, is because it will discount the future cash flows to help you determine the eventual net present value. As an example, $10,000 earned next year at a 10% discount rate is only $9000 today. $10,000 earned 2 years from now is worth only $8100 today because it’s discounted twice at 10%. That's the entire point of this exercise. What is the asset worth in today's dollars?

For further reading, check out Wikipedia's article on discounted cash flow.

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More About Annual Revenue

Annual Revenue is pretty straight forward but should be carefully considered. Just enter what you anticipate the revenue to be each year that you will own the site.

When we use this tool ourselves, we'll first want to see what the NPV will look like just entering in the site's current revenue and expenses every year. Then after we've digested the numbers, we'll start playing with them. Before we make a decision on whether it's a good deal or not, we'll often fill out this form and change the revenue and expense numbers dozens of times, if not more.

More About Annual Expenses

Annual Expenses follows the same rules as annual revenue. Try it with different numbers. See what the NPV comes out at by increasing the expenses to improve the site or double down on seo services. Take a look at what would happen if you lowered expenses. Try as many different combinations as you can to help you make the decision and plan accordingly.

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More About Exit/Sale Price

Sale Price. As any savvy investor will tell you, never start a business or buy one without an exit strategy. You should know in advance what you think you will eventually liquidate for and when you expect that to happen.

If you are buying the site purely for cash flow and you anticipate the cash flow remaining constant then you might want to enter the same amount you are paying for the site. However, that's rarely how things play out. The truth is whatever number you put there will be discounted by the discount rate and the risk factor mentioned above. So the same dollar figure in the future is not the same amount today. You will need to increase the value to get he same amount back.

Most buyers will adjust the revenue and expenses in future years in order to grow the site and then apply a simple multiple of revenue in this section. That works just fine for the exercise. It’s alright to price a site on a multiple. Just keep in mind that when you are buying a site, we are looking for the net present value of that future sales price.

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More About Perpetuity Value

Any Net Present Value calculator requires what they call a "Terminal Value." If you aren't going to be selling the asset, mathematically the right thing to do is to enter a perpetuity value. The perpetuity value is the value of cash flow that never ends. Don't worry though. We understand that cash flow far out in the future is really risky. That's why the perpetuity value gets discounted by the discount rate and risk factor.

For example, if someone told you they would give you $1 per year for the rest of your life, what would you pay for that? Well, at a 10% discount rate the math would be $1/.10 or $10. The contract would be worth $10. If you thought there was a 20% chance that you would never get that payment, you would add 20 to the discount rate and divide the cash flow by 30 or $1/.30 which comes to $3.33. That's all $1 per year for life would be worth if the future cash flow were discounted heavily.

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