Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / The SaaS Business That Sold for 8x Revenue With No Earnings
Transcript
- Lucas: So last month I watched a SaaS company with zero profit sell for eight times its annual recurring revenue. No earnings, no EBITDA, just a clean book of subscriptions and a founder who understood how to structure the deal. Luna: Eight times revenue with no earnings? That sounds like a 2021 valuation. What was the business? Lucas: It's a small B2B software tool — project management for construction subcontractors. About two thousand paying accounts, average monthly subscription of ninety-nine dollars. So call it roughly two point four million in annual recurring revenue. The sale price? Just under nineteen million. Luna: And no profit. How does that math work for a buyer? Lucas: That's exactly the question. The company was spending almost all of its revenue on customer acquisition and R&D. Gross margins were around seventy-five percent, but after sales and marketing and engineering, net income was basically zero. A traditional EBITDA multiple would have valued this thing at maybe one times revenue — two and a half million. The seller got eight times by making the buyer believe in the growth trajectory and by offering what's called a seller note. Luna: A seller note. So the seller is essentially lending the buyer part of the purchase price. Lucas: Right. In this case, the deal was structured as sixty percent cash at close, twenty percent seller note payable over three years at six percent interest, and twenty percent earnout tied to revenue hitting four million by year three. The seller note gave the buyer confidence that the founder would stay engaged during the transition, because if the business fell apart, the note wouldn't get paid. Luna: And the earnout — that's what got the multiple up to eight times. The buyer was willing to pay a premium for future growth, but only if it materialized. Lucas: Exactly. The base valuation at closing was about five times ARR, or twelve million. The earnout could add up to another seven million if they hit the target. So the seller took on some risk, but the upside was enormous. The buyer gets protection — if growth stalls, they pay less. Luna: What was the due diligence trap you mentioned? The thing that nearly killed the deal? Lucas: Churn. The buyer's financial analyst looked at the trailing twelve months and saw that monthly churn was running at three point five percent. That's high for a B2B SaaS — most investors want under two percent. The buyer almost walked. But the seller had a secret weapon: a cohort analysis showing that churn was heavily concentrated in accounts under ten users. Accounts with over ten users had churn below one percent. Luna: So the problem wasn't the product — it was that they were selling to too many tiny customers who didn't get enough value. Lucas: Exactly. The seller proposed a clause in the earnout agreement: they would increase the minimum seat count for new customers from one to five, and the buyer agreed to a lower earnout threshold if churn dropped below two percent. That clause saved the deal. Luna: It's a good reminder that in a private sale, the data you show can make or break the price. You don't just hand over a P&L — you tell a story with the metrics. Lucas: And you prep the data six months before you even go to market. The seller here started tracking cohort retention, customer lifetime value, and net revenue retention — the metrics that SaaS buyers actually care about — well before they engaged a broker. Luna: That's a smart move. Most small business owners don't think about that until they're in the middle of due diligence. Lucas: And then they get lowballed or the deal falls apart. The seller in this case told me he spent about two thousand dollars on a fractional CFO to clean up the reporting. That two thousand probably added two million to the sale price. Luna: So the takeaway for a SaaS founder listening: start tracking your cohort data and net revenue retention at least a year before you sell. Lucas: Absolutely. And if you're a buyer, don't just look at aggregate churn — dig into the segments. That analyst almost cost the buyer a good deal because they didn't look past the headline number. Luna: Speaking of good deals — you know, conversations like this are exactly why we keep this show ad-free. We want to dig into real numbers and real structures without pitching you a mattress or a meal kit. Lucas: It's a deliberate choice. If these episodes have helped you think about your own business, or given you a concrete framework for a sale, that's the return we're after. And if you want to support that, there's a link: buy me a coffee dot com slash fexingo. Luna: No pressure. It's just a way for people who get value from the show to keep it going. Lucas: Right. Anyway — back to the earnout. The seller I mentioned hit his year-one revenue target and got a check for the first earnout tranche. But there's a lesson in how he structured that earnout that a lot of people miss. Luna: What's the lesson? Lucas: He made sure the earnout was based on gross revenue, not net revenue. Because if it's net, the buyer can cut marketing spend, boost short-term profit, and starve the growth that the earnout was supposed to reward. The seller's attorney insisted on a gross revenue definition, and that prevented a conflict. Luna: Smart. I've seen deals where the earnout definition basically guaranteed a fight later. One seller I know had an earnout based on 'adjusted EBITDA' and the buyer reclassified all sorts of expenses. Lucas: That's the classic trap. The cleaner the earnout formula, the less likely you end up in court. In this SaaS deal, the earnout was simply: if trailing twelve-month gross recurring revenue exceeds four million dollars on any month-end during the earnout period, the seller gets a lump sum of seven million. No adjustments, no add-backs. Luna: So that's clear — either the revenue number hits or it doesn't. No room for interpretation. Lucas: Exactly. And the seller made sure he had access to the company's financial reports quarterly to verify the numbers. That was another clause his lawyer insisted on. Luna: What about the buyer? Did they get any protections beyond the seller note? Lucas: Yes — they negotiated a non-compete that lasted five years and covered not just the specific software niche, but adjacent construction tech. And they required the seller to stay on as a consultant for twelve months at a reduced salary, which helped with the transition. Luna: So the seller is locked in, but they also have a financial incentive to grow the business. That aligns both sides. Lucas: That's the ideal. Private sales work best when both parties have skin in the game after closing. The seller note and earnout did that. The buyer got a business they believed in, the seller got a life-changing payout — if they hit the numbers. Luna: And if they don't, they still walk away with twelve million. Not bad. Lucas: Not bad at all. But the real lesson for anyone listening: prepare your data, pick the right multiple framework — revenue, not EBITDA, for a SaaS business — and structure the deal so that both sides can win. That's how you get eight times revenue out of a company with no earnings in 2026. Luna: And if you want to dig into your own numbers, maybe start with that fractional CFO. Lucas: Exactly. Next episode, I want to talk about the opposite scenario — a manufacturing business that sold for a huge multiple despite declining revenue. But that's for another day.