SaaS Valuation Calculator
Valuation Summary
How to Value a SaaS Company
Valuing a Software as a Service (SaaS) business differs significantly from traditional brick-and-mortar industries. Because SaaS companies often reinvest all profits into growth, they are typically valued based on a revenue multiple rather than a multiple of EBITDA or net income.
Key Metrics Influencing Valuation
- Annual Recurring Revenue (ARR): The bedrock of your valuation. This is the predictable revenue generated by subscriptions over a year.
- Growth Rate: The faster you grow, the higher your multiple. A company growing at 100% YoY will command a significantly higher premium than one growing at 20%.
- Gross Margin: High-quality SaaS businesses usually operate at 75% to 85% gross margins. Lower margins may suggest high service costs, which decreases the valuation multiple.
- Net Revenue Retention (NRR) / Churn: Investors pay for stability. High churn rates (the rate at which customers leave) act as a "leaky bucket," severely damaging your valuation.
The Rule of 40
The "Rule of 40" is a health metric for SaaS companies. It states that your Growth Rate + Profit Margin should equal at least 40%. In the calculator above, if your combined score is over 40%, your business is considered to be on a high-performing trajectory, making it much more attractive to VC firms and buyers.
Valuation Example
Imagine a SaaS company with $2,000,000 in ARR, growing at 50% year-over-year, with a 5% annual churn rate. If the current market conditions suggest an 8x multiple for that growth profile:
$2,000,000 (ARR) x 8 (Multiple) = $16,000,000 Valuation
Factors like proprietary technology (moats), market size (TAM), and the strength of the management team can further push this multiple higher or lower.