How to value a SaaS business?

How to value a SaaS business? 6 key metrics to measure performance.

When it comes to SaaS company valuation, the easiest way is to get a multiple based on ARR (Annual Recurring Revenue) or MRR (Monthly Recurring Revenue). In these times of high reward for SaaS businesses, the range is between 4 to 6 times ARR or 50 to 80 times MRR. So, it seems quite easy to make a quick valuation based on those ranges. 

If you deep dive into public SaaS companies, you see that this valuation range varies widely, from 3 times to 40 times ARR for the best SaaS businesses. What can explain such a magnitude of multiples for listed companies? The answer is the same as for “regular” businesses: every company is different and should be analyzed and evaluated using with macro and micro views.  The macro factors play in the same manner for SaaS businesses. For the micro factors, we have seen that specific indicators are used by VCs and SaaS acquirers. Here are some good ones that we like to pay attention to: 

Metric Definition  
MRRMonthly Recurring Revenue. It’s a normalized measurement of recurring revenue. An easy way to calculate it, is using the Average Revenue Per Account (ARPA). 
CACCustomer Acquisition Costs. It can be calculated by dividing all the costs related to acquiring more customers (S&M) by the number of customers acquired during a given time. 
CLTVCustomer Lifetime Value. It’s the average amount of revenue a customer generates over its lifetime.  
Churn rate It’s the number of customers the company loses within a certain period of time.  
Cohort analysisChurn is such a critical element, it’s important to get insight from a specific group of customers over a period of lifetime. 
Payback PeriodHow many months are necessary to payback the cost of acquisition?   
SaaS metrics definitions

Besides these typical SaaS metrics, the classical factors continue to play a crucial role on the valuation: team, product, market size, competition, profitability, etc.

While SaaS businesses are in the spotlight, significant variability is observed in the valuations of these businesses.
Whether you are the head of a SaaS company or an investor, having a professional adviser at your side for fundraising or M&A operations can benefit all parties to structure the deal on trustworthy and recognized basics.

Do you still have questions regarding how to value a SaaS Business? Contact us.