Top 10 reasons Why not to undervalue your Startup With Anthony Nitsos

Anthony Nitsos provides proven scaling strategies for SaaS CEOs and Founders with best-in-class finance and stakeholder “ecosystems” that always produce the right numbers, save cash, protect assets, and free CEOs and Founders to focus on what matters most–growth.

Anthony brings a unique mix of medical school training, Six Sigma Black Belt process expertise, and the financial skills of a CFO with two unicorn exits and numerous other start-ups to his credit to provide the world’s most sought-after resource for B2B SaaS company financial strategy and operations.

Episode Highlights Here:

Anthony:

I look at it from a very basic perspective, which is how do I help you maximize the valuation of this company?

Pierce:

You mentioned that you helped a couple of companies exit for high valuations. Did you have anything to do with the tax consequences? and how did you kind of navigated those situations?

Anthony:

I’m sorry, I am not a tax guy. Okay. So I know when I found out I was going to be on your choice, a waiver, it’s all about tax. Are you sure I should be in this program? I, I know enough to be dangerous, right? Which is, you know, to basically, but what I’m focused on is maximizing the company’s valuation, right? Because in the end, however, the tax treatment falls out, you have to have cash receipts to come in, to worry about it. You know, so I look at it from a very basic perspective, which is how do I help you maximize the valuation of this company? and it can come in several ways. One of the ways that it comes in most, to me, is how you can how structure your contracts. Many SaaS companies will go out there and say, Hey, we need to have an upfront implementation cost in addition to our recurring revenue, and I’ll go no, you don’t. Do you know what the multiple is on services? Just off the top of your head? No, 312, maybe three, if you’re really lucky. What’s the multiple on recurring revenue? 10 and 1520, you can do the math as easily as I do. If 25% or 50% of your revenue is coming from implementation services and the rest of its coming from arr. You’re screwing yourself, done? You’re screwing yourself, okay? Because what you should be doing is figuring out three things. One, how do I make my product stand up on its own so that I don’t have to have implementation costs? Number two, how do I make my product bulletproof so that I don’t have a support team that has to constantly Chase bugs and deal with customers who either don’t understand the product or don’t work? and number three, how do I take the cost of that implementation and roll it into my recurring revenue number? Because let’s say it costs you $15,000 to implement, just throw a number out there, and your average sales price is 10,000. Right? Your recurring revenue is 10,000. Well, based on that one, your multiple on your recurring revenue. Let’s say it’s 100,000. We’ll use 10, and your vet, so your valuation is 100,000 and your $15,000 worth of implementation is worth nothing, maybe 15,000. So you have a $115,000 valuation? What if I were to say, Hey, what’s your average life expectancy of your customer? The three years, five years? Why don’t you take that 15,000? And instead of charging 15,000 up front and 10,000 years, once, you’re just charging 15,000 a year. Now, the valuation is 150 out of the gate before you even haven’t changed anything. All you did was change the contract and the terms. You still have the implementation team, and they’re still there. Now the focus will be on your gross margin. Right. So they’re gonna.

Pierce:

let me dive into that real quick. So so if you can change your reoccurring revenue? Yep. Okay. I mean, that adds $15,000 of cost every single year to that client.

Anthony:

Yes, it does, or 5000. Right. So they, you’re saying, Okay, I could charge them 15,000 upfront, but I’m looking at it from the perspective of the software company, not necessarily the client, right? Okay. If the product is there, and the value prop is there, you know, maybe 10,000 to 5000 isn’t the right but the number if, if they need that product, and you can demonstrate the value prop to them, they’re gonna buy it. Okay, and you probably have more room to have higher recurring revenue than you do to have higher implementations. And again, I will come back to your services revenue when you go in front of an investor and you’re looking to set a pre-money valuation. They’re going to look at your service and say, that’s nice. Show me your arr. Right.

Pierce:

Yeah. Okay. So, what you’re saying is if you can change the contract, instead of it being one lump sum, 15,000 bucks, or whatever, a one-time implementation fee if you can. Amortize that out as reoccurring revenue, then now you’ve just increased the value of your business exponentially.

Anthony:

Where it’s going to hurt you, maybe hurt you. Is that your well I’m not getting that cash upfront to cover my costs well says it should be paid in advance one year? So you can get that 15,000 paid up front don’t go, don’t do monthly, do annual, especially if you’re in b2b. b2b should be annually paid in advance. Always, and a story that’s the gold standard. So I look at it and say, this is, you know, we’re gonna go in and work this into the cash forecast, right? Because the first thing I’m going to look at is, alright, can you afford to do this Cash Wise, I don’t want to do something stupid. But at the same time, I’m gonna push to say, Look, you need to get away from these big upfront fees and charge recurring revenue. Because exactly what you just did, amortize it over the expected life of the customer or maybe amortize it over the first three years; pick an amortization period. That makes sense, right? But build it into your error. Right? and you will increase the value of your company just with that simple change. I have done this with I don’t know how many clients I’ve lost track of, and because they’re like, Oh, we got to do this. I’m like, No, you don’t. This is what you have to do, and once I explained it to him and shown to him and it again, this is not rocket science, right? It’s just like right. Here it is. Simple. 10 times this one times that, which one do you want to have more of?

Pierce:

Yeah, no, that makes a lot of sense.

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About Anthony Nitsos

Anthony Nitsos Anthony Nitsos provides proven scaling strategies for SaaS CEOs and Founders with best-in-class finance and stakeholder “ecosystems” that always produce the right numbers, save cash, protect assets, and free CEOs and Founders to focus on what matters most–growth.