For tech founders, SaaS company valuations often become urgent only when raising capital or considering a sale. But by then, many of the inputs that determine the value of your company, like growth quality, margin structure, and retention, have already taken shape.
The valuation of your software company reflects how the market and buyers interpret your financial performance, execution, capital allocation, and product decisions, as well as growth projections. That's why understanding it early on can inform smarter choices throughout your growth journey.
A SaaS valuation can shape how you invest in headcount and your go-to-market strategies, including customer acquisition channels as well as the way you prioritize features for your product that drive monetization or reduce churn.
Whether you're preparing your exit strategy or keeping your options open, knowing how buyers may value your business helps you make better decisions now and stay prepared for whatever comes next.
Differentiating valuation methods in M&A
The right SaaS company valuation method depends on factors like the scale of your business, margin profile, capital structure, and the type of buyer you are targeting. A seasoned advisor can help you select the right approach early by aligning your strategy with the realities of your business and the expectations of the market.
Fundraising vs. exit valuations: What's the difference
Valuations used to raise capital, especially from VCs, tend to reflect future potential and aggressive growth assumptions. By contrast, buyers in M&A processes often value based on realized performance and return timelines.
Here are the two of the most common methods used to value a SaaS company for an acquisition, and when each typically applies. It's also crucial to address legal considerations such as the M&A NDA for SaaS companies, which play a vital role in protecting sensitive information during the transaction.
1. Revenue multiples
This measures the value of the business by how much predictable revenue its active subscriptions generate each year.The revenue multiple framework is the most common for VC-backed or growth-stage SaaS. Investors use this approach when growth is the primary value driver and/or if the company isn’t yet optimized for profitability.
It is typically expressed as a multiple of Annual Recurring Revenue (ARR), a core SaaS metric that represents the value of recurring revenue a company expects to generate from its customers on an annualized basis. It is used to assess the scale and stability of a SaaS company’s business model, especially for companies built around annual or monthly contracts.
How to calculate ARR
ARR = Monthly Recurring Revenue (MRR) × 12
For example, if you’re generating $100,000 in MRR, your ARR is $1.2 million.
ARR Includes:
- Subscription fees
- Platform access charges (if billed on a recurring basis)
- Maintenance contracts (if billed on a recurring basis)
ARR excludes:
- One-time setup or onboarding fees
- Professional services revenue
- Variable usage-based charges (unless contracted as recurring)
2. EBITDA multiples
This measures the value of the business based on its earnings today (EBITDA).
An EBITDA valuation is most relevant, and often the most common framework, for mature SaaS companies with steady margins. It’s typically favored by private equity firms and strategic acquirers who prioritize sustainable cash flow and ROI.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It reflects the company’s earnings from core operations, stripped of capital structure and accounting decisions. Investors use it as a proxy for cash-generating potential.
Unlike revenue multiples, which emphasize growth, EBITDA-based valuations reward capital efficiency, cost control, and the ability to generate durable margins. Companies that qualify for this method often:
- Have positive EBITDA
- Operate with disciplined burn
- Prioritize long-term sustainability over top-line expansion
SaaS businesses with enterprise customers, high retention, and stable unit economics often command higher EBITDA multiples, especially in buyer markets where profitability is valued over velocity.
Hybrid approach
Many acquirers may also take a dual approach when valuing a SaaS company. For a high-growth business that is already generating strong EBITDA, the revenue multiple often sets the ceiling, reflecting the company’s growth potential, while the EBITDA multiple provides the floor, ensuring a baseline for profitability and cash flow. This approach helps balance the excitement of growth with the reality of current earnings.
In practice, acquirers may price a deal primarily based on revenue, especially for fast-growing SaaS companies, but they often perform a sanity check against EBITDA. This ensures they aren’t overpaying relative to the company’s actual cash-generating ability, providing a safeguard for investors who care about sustainable returns.
How to choose the right SaaS valuation method
For M&A, the right valuation method is the one buyers are most likely to use when assessing your business.
If you're raising capital now with a sale in mind, keep this in mind. Fundraising valuations, especially from VCs, are often inflated compared to M&A valuations. Investors in capital raise value future potential, while M&A buyers value proven performance and returns they can realize quickly.
If you raise at a high multiple, you’ll need to sell for an even higher one just to clear investor preferences and retain meaningful founder proceeds. Too much dilution plus an overvalued raise can leave little on the table for you at exit.
If you’re unsure how your SaaS business might be valued in today’s M&A environment, we can help you assess your valuation range and the right methodology.
What drives SaaS revenue multiples up or down
In M&A, a revenue multiple reflects how much a buyer is willing to pay for your recurring revenue stream. But it’s not a fixed number as it moves up or down based on both your performance and market appetite.
Key drivers that push multiples higher:
- Strong growth rate: High and consistent ARR growth signals market demand.
- Net revenue retention (NRR) above 100%: Shows customers are not only staying but expanding their spend.
- Efficient customer acquisition: Fast payback periods and healthy LTV:CAC ratios reduce risk.
- LTV:CAC is a ratio that compares a customer's lifetime value (LTV) to the cost of acquiring that customer (CAC).
- High gross margins: More room for profit expansion post-acquisition.
- Strategic fit: If your product fills a gap for a buyer, they may stretch on valuation.
Factors that pull SaaS valuation multiples down:
- Flat or declining growth
- High churn or low NRR
- Customer concentration: Over-reliance on one or two large accounts
- Inefficient growth: High burn multiple with slow payback
- Constrained cash flow
- Crowded or commoditized market position
SaaS metrics that shape your valuation
In M&A, buyers look beyond revenue to understand the quality of that revenue. The right metrics show not just how much you sell, but how well you retain, monetize, and grow your customer base. Presenting these KPIs clearly can directly influence your multiple.
Core SaaS metrics to track and present
Tip for founders
Before entering a sale process, benchmark your metrics against comparable acquired companies, not just public SaaS peers or VC-backed unicorns. This avoids inflated expectations and ensures you’re speaking the same language as your buyers.
Other factors that impact a SaaS business valuation
While the metrics above tell part of the story, buyers also assess qualitative elements when valuating SaaS companies. These non-financial elements may influence risk, scalability, and long-term potential, bringing your multiple up or down.
Leadership depth and succession planning
- Buyers want confidence that the business can thrive without the founder.
- A strong management team and clear succession plan reduce perceived dependency risk.
Competitive positioning
- Niche leadership, defensible IP, and pricing power can justify higher multiples.
- Commoditized offerings in crowded markets tend to trade lower.
Go-to-market resilience
- Strong partner networks, effective sales leadership, and diversified channels enhance buyer confidence.
Market timing
- M&A appetite in your vertical can accelerate processes and valuations.
- If your segment is in demand or strategically relevant, that generally conveys competitive multiples.
Preparing for a SaaS valuation conversation
M&A diligence is as much about how you present your business as it is about the business itself. Advisors are experts on getting the narrative right. The more organized and defensible your information, the more confident a buyer will be, and the smoother the selling process will run.
Quick pre-valuation checklist for founders
- Benchmark your KPIs against recently acquired companies of similar size and segment, not just public or VC-backed peers.
- Build a clean ARR bridge showing monthly growth broken down into expansions, contractions, churn, and new bookings.
- Prepare historical MRR reports (at least 24 months) with consistent definitions.
- Ensure compliant financials or provide clear cash-to-accrual reconciliations.
- Organize customer data with cohort analysis, retention metrics, and segmentation.
- Develop a clear go-to-market story that explains how you acquire, retain, and expand customers.
- Anticipate buyer diligence questions and prepare concise, data-backed answers.
Common SaaS valuation mistakes founders make
Every inconsistency, overstatement, or gap in your data could be an opportunity for buyers to renegotiate the multiple they were willing to pay initially. Precision and transparency build trust, and trust can directly influence your multiple.
Here are some frequent pitfalls to avoid:
- Reporting booked revenue instead of realized MRR or ARR
Buyers want to see actual, recurring revenue, not contracted amounts that haven’t yet materialized. - Including one-time services revenue in recurring figures
This inflates ARR and erodes credibility when uncovered in diligence. - Underestimating churn or failing to present NRR by cohort
Aggregated churn figures can hide retention issues. Buyers will segment the data anyway. - Presenting metrics without clear definitions or source documentation
Inconsistent calculations trigger red flags and slow down the process. - Benchmarking against unrealistic comps
Comparing your business to a high-growth, VC-funded public SaaS company can mislead your team and set unachievable price expectations in M&A. - Over-raising before an exit
Raising at an inflated valuation can make it harder to achieve a profitable founder outcome. Buyers pay for realized performance, not VC-style projections.
Get the right valuation for your SaaS business
For SaaS founders, treating valuation as an ongoing discipline rather than a one-time event can change the trajectory of both your company and your personal outcome.
The same metrics and qualitative factors that determine price in an M&A process should guide your decisions well before you engage with buyers.
With disciplined metrics, a credible story, and an advisor who understands both your business and the market, you can approach valuation from a position of strength, whether you’re planning to sell in the near term or simply building optionality for the future.
Contact L40° M&A advisors to request a complimentary valuation assessment.
