SaaS for SMBs: PR Is the Same, but Valuations Have Radically Changed

I saw an ad this morning for SurePayroll, which triggered me to learn more about the company. I was intrigued because while I had heard of SurePayroll, I had not realized it was part of the larger, more established small business payroll company Paychex. I discovered that SurePayroll was acquired in 2010 by Paychex for around $115 million.

A key sentence in the release about the shift to SaaS for payroll seems like it could have been written today: “The acquisition combines SurePayroll’s next-generation, web-based payroll platform with Paychex’s 40 years of payroll experience and world-class customer service, and provides small businesses access to a SaaS-based technology that allows customers to process payroll in minutes, anytime or anywhere, using a web browser or iPhone application.”

That “time stood still” quality is also true of a quote from then Paychex CEO Martin Mucci. “This acquisition helps Paychex expand further into a new segment of the online market for small business – a fast-growing part of the market that we believe will continue to thrive.”

The release adds, “In addition to marketing its SaaS-based product suite directly to small businesses, SurePayroll has a leading position with a variety of channel partners, including some of the nation’s foremost banking institutions, such as Citibank, Harris Bank, and SunTrust Bank. The financial institutions provide the SurePayroll offerings to their small business customers through private-label and referral agreements.”

So is the market the same today as it was in 2010? In some ways, perhaps. But the valuations and economics seem to have changed radically.

SurePayroll was founded in 2000 and by 2010 it had 30,000 customers, most if not all SMBs. The exit math puts the value per customer at about $3,800. And 30,000 customers over a decade is an interesting and potentially useful benchmark. Paychex competitor Gusto launched in 2011. At the end of last year (7 years after founding), they have roughly 60,000 customers.

Last summer, Gusto took another round of financing: $140 million at a valuation of $2 billion — or $33,333 per customer. That’s 10X what SurePayroll got less than a decade earlier. Using a similar calculation, Paychex (owner of SurePayroll) last reported 605,000 payroll customers. The company is valued at almost $30 billion, suggesting a per-customer value of almost $50,000.

What’s the takeaway? It is hard to know what financial shape SurePayroll was in in 2010 when it agreed to be acquired. If it hadn’t taken any outside capital, an exit of $115 million was probably decent for the principals. Another view is that a per-customer valuation of $3,800 is a far cry from the nearly $50,000 per customer Paychex enjoys today.

Discover what kinds of economics and KPIs are driving SaaS valuations today at LSA’s Engage conference, June 3 – 4 in Washington, D.C. Join Google, LegalZoom, Fundbox, Nutshell. LocalIQ, Jump, Upserve and others at a unique event that brings small business owners and industry professionals together for a two-way conversation about the future of SMB SaaS.

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