Valuing a SaaS business isn’t quite like valuing your average widget company. The recurring revenue model changes everything and, if you get it right, you could be sitting on something worth a lot more than you think.
So, how do you actually put a number on it? There are two main approaches for how to value a SaaS business, and which one applies to you depends largely on whether your business is profitable yet.
Method 1: The traditional earnings basis
This is the standard valuation model for any profitable business, SaaS or otherwise. You take your earnings (usually EBITDA) and multiply them by an appropriate price-to-earnings (P/E) ratio.
But here’s the catch for smaller, founder-led businesses: you need to normalise your profits first. That means stripping out the founder’s salary (or lack thereof), any discretionary costs, and adding back in a realistic market-rate salary. This gives you a true picture of what the business would earn under normal management.
Once you’ve arrived at a sensible profit figure, you multiply it by a P/E ratio. The exact multiple depends on sector, growth prospects, and risk, but for many UK SMEs it sits between 3x and 8x.
| If maths is not your thing…shoot us an email at [email protected].We can crunch the numbers for you and give you a valuation that is accurate. Not only that but we can also help with deciding what to do with that value and increasing its value. |
Method 2: The recurring revenue basis
The second method for how to value a SaaS business is the recurring revenue basis (and this is where it gets interesting).
If your business isn’t yet profitable or if profitability doesn’t reflect its true potential, you may be better off using a recurring revenue multiple. This is common in software businesses, especially early-stage ones burning cash on growth.
Revenue multiples typically range from 4x to 20x monthly recurring revenue (MRR), depending on the health of your business. Yes, that’s a wide range, and where you fall depends on several factors.
What affects your revenue multiple?
Not all recurring revenue is created equal. Here’s what drives the multiple up (or down):
Customer lifetime value: The longer your customers stick around, the more valuable each one is. Higher lifetime value = higher multiple.
Customer acquisition cost (CAC): If it costs you more to acquire a customer than they’re worth, you’ve got a problem. Lower CAC = higher valuation.
Customer churn: Some churn is inevitable, but high churn is a red flag. The lower your churn rate, the healthier your business looks to buyers.
Annual revenue growth: Strong growth drives higher valuations. But let’s be honest: double-digit growth gets harder to maintain as you scale.
EBITDA profitability: Even in a revenue-based valuation, profitability matters. Better margins mean a better multiple.
Rule of 40: This metric (revenue growth % + profit margin %) is particularly useful for SaaS. A score over 40 typically commands a premium valuation.
A note on EVR (Enterprise Value / Revenue)
One ratio that tends to show more stability over time is Enterprise Value to Revenue (EVR). You calculate this by dividing your company’s revenue multiple by its target EBITDA margin.
It’s not a valuation method in itself, but it’s a handy way to sanity-check whether your MRR multiple is realistic. Published data suggests EVR tends to average around 5x when you smooth out the peaks (like the 2021 SaaS boom) and troughs (like the 2022 correction).
So what’s your SaaS business actually worth?
Honestly? It depends. But understanding these two methods and the factors that influence multiples gives you a solid foundation for any conversation with investors or acquirers.
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