Business Valuation for Shopify Apps
Business valuation becomes crucial for various reasons, with common scenarios including acquisitions and fundraising. Accurately determining the monetary value of a business is essential when contemplating selling, buying, or seeking equity or debt to finance operations.
Having closely collaborated with numerous SaaS businesses, particularly those specializing in Shopify Apps, we’ve delved into the methodologies and considerations behind algorithms that determine business valuation. Our focus narrowed down to the unique dynamics of platform-dependent SaaS businesses, particularly those catering to the needs of merchants on the Shopify platform. We have initially started off by determining a valuation range within a generous confidence interval but soon developed a methodology for a more precise outcome.
Our analysis, involving over a hundred businesses, revealed the significance of ten key metrics initially. However, for Shopify Apps, we distilled our approach to three key metrics with substantial weight in determining valuations: retention, net margin, and revenue growth.
In our exploration, we observed that a slight difference in Monthly Recurring Revenue (MRR) retention could lead to significant deviations in valuation. This sensitivity emphasizes the importance of certain metrics, particularly for longer-term projections spanning up to 5 years.
Revenue retention, a critical metric, showcased our model’s sensitivity, particularly as retention figures approached 89% and above. Net margin, another crucial factor, emerged as a reliable predictor, with levels above 30% indicating upper quartile valuations and exceeding 60% likely placing a business in the upper 10% among comparable peers.
Month-on-month revenue growth proved instrumental in our approach. Crossing the 10% threshold marked a crucial turning point, with further valuation improvements observed when growth surpassed 35%.
These insights into revenue retention, net margin, and revenue growth deepened our understanding of valuation nuances. Over nearly two years of data collection, we continually compared our algorithmic approach with real market deals. Simultaneously, we provided business valuation services to clients, primarily utilizing the discounted cash flow model as a reference point, avoiding potential deviations from fundamental methods that might occur with a purely algorithmic approach.
Our extensive research highlighted a diverse range of Annual Recurring Revenue (ARR) multiples for Shopify Apps, typically ranging from 1.6x for weaker performers to 4.4x for stronger players. Mature businesses with multiple Apps often commanded higher multiples, reinforcing the correlation between age, performance, and valuation.
While our approach is especially a good fit for Shopify applications with more than 6 months of historic data (revenue generating), MRR above $1k, 50+ merchants (subscribers), low customer churn below 20%, and a stable growth trajectory, it might yield somewhat surprising results for newer Apps with limited historical data. It is therefore best to accumulate a track-record of at least 6–9 months before attempting to derive an accurate business valuation.
As we anticipate potential shifts in the interest environment in 2024, our commitment to perfecting our algorithm remains unwavering. Central banks hinting at rate cuts may influence SaaS valuations, adding another layer of complexity to the already intricate landscape. Nevertheless, our fundamental recommendation to Shopify App developers remains steadfast — focus on building a robust business with strong revenue growth, low churn, and healthy cash flow generation. By getting the fundamentals right, a fair business valuation will likely be within reach.