What is a vertical SaaS platform worth?

Software built for one industry’s daily work — clinic scheduling, dealership management, trust accounting, contractor billing — raises valuation questions that go beyond the code: how hard it is for customers to leave, and how many firms remain to sell to inside a finite industry. This guide sets out questions to ask in Canada. It describes method, not numbers. Any multiple mentioned in general industry commentary is illustrative, and none of it is an appraisal of a particular business.

Lock-in is built from specific things

“Sticky” is a description worth testing: the question is what the stickiness is made of. In a vertical platform it may come from years of the customer’s own records sitting in the system, workflows configured to match how that firm really operates, staff trained on it, and connections to the other systems the industry already uses, such as the clinical record, the dealer system or the accounting package. Each connection is a reason a customer would have to rebuild something to leave. Evidence to ask for includes how long onboarding really takes, what departing customers say, how often anyone has asked for a full export of their data, and whether customers who left went to a rival or simply stopped. It is worth separating customers who stay only because moving is painful from those who stay because the product fits best.

The size of the vertical sets the ceiling

A platform that serves one industry can only grow so far inside it, so it matters how far along it already is. The question is what share of the firms in the industry already use the product. Statistics Canada publishes Canadian Business Counts, location counts of businesses with employees by industry classification (NAICS), which gives a first estimate of how many firms the vertical contains, and the seller’s own customer list shows the share already won. If a platform already serves most of its industry, growth may have to come from extra modules, payment features, price changes or buying rivals, and each carries its own risk. If it serves a small share, the question is why the rest have not signed.

Product revenue and services revenue are worth separating

Heavy customization is worth testing for. Implementation fees, data migration, custom reports and one-customer integrations are paid for with engineering hours, so that revenue can behave like services work: it may track headcount, carry a thinner margin and not renew by itself. A buyer can split revenue into subscription, usage, payments and project fees, and read the project line as effort the next owner must keep staffing rather than as recurring revenue. A customer running a version of the product that nobody else uses can also raise support cost with every release.

Compliance features depend on the rules holding still

Where a platform builds an industry’s rules into the product, such as record retention, filing formats or trust-accounting reports, a rule change can force a rebuild at the vendor’s cost, so it is worth asking how quickly past changes shipped. In health, for example, the Information and Privacy Commissioner of Ontario says a custodian’s obligations under the Personal Health Information Protection Act do not end until a legally authorized successor has custody and control of the records, so a clinic customer cares how the platform keeps, secures and returns them. That is an Ontario statute; the position in other provinces has to be checked against their own rules.

Where new customers come from

In a vertical, it is worth asking which channels supply new customers, for example a professional association’s endorsement, a listing in the marketplace of the industry’s dominant system, or a reseller. Any of those can be withdrawn, so these are things to check.

• Most new customers arriving through one association endorsement or one partner program, with nothing in writing that survives a change of owner
• A product that depends on a single integration with the industry’s dominant system, whose owner can reprice it or restrict access
• Implementation and custom work reported inside subscription revenue, so recurring revenue looks larger than it is
• Revenue held by a few large accounts, which a buyer can test by asking what happens if each leaves at renewal; the glossary entry on customer concentration explains the idea
• A founder who is the industry’s known face and the only person key customers will call; BDC notes that buyers may insist on a reduced price if the seller cuts all ties

How earnings are recast, and why look-alikes price apart

Reported profit can be adjusted before it is priced. The owner’s pay can be replaced with the cost of the roles the owner fills (an owner may be lead developer, support desk and salesperson at once), and one-off migration work can be separated from recurring margin; the entry on add-backs covers the technique. SR&ED claims can be examined as well. The CRA describes the incentives as a deduction against income and an investment tax credit, claimed with the income tax return, so a buyer can ask how well the work behind past claims is documented and how the deal structure affects any credit history, a question for a tax advisor. Picture two scheduling platforms for the same trade with matching revenue. One connects to the industry’s main system, has reference customers who will take a call, and sells directly. The other runs through one association and one connector. The first has revenue that is easier to evidence as recurring; the second depends on whether one association and one connector stay in place.

Who is buying changes the answer

It is worth asking which kinds of buyer might look at the same platform, for example a larger software company already serving the industry, a private equity platform assembling several vertical products, or a strategic buyer that sells other systems to the same customers. BDC lists the buyer’s strategic interests among the factors that can affect a final selling price, and says a strategic buyer is often willing to pay more because it sees synergies. A seller can ask each buyer what it wants from the platform, whether customers to cross-sell, retention and predictable cash, or access to the industry. Offers for one platform can differ, and the answer on SaaS multiples is only a starting point.