What is my SaaS Business Worth?

Unsurprisingly, this is the most common question we get from founders: what is my business worth? And why not, after all, you’ve sacrificed so much as a founder…what reward might be realized from all that effort? Unfortunately, the answer is fairly complicated. That said, we’ve summarized below some factors (both qualitative and quantitative) that will influence your business’s valuation to hopefully shed some light on a rather opaque and complicated question:

Who is the Buyer or Investor?

Different counterparties may ascribe wildly different values to your business. Generally speaking, strategic acquirers who are buying 100% of your business will be at the highest end of the spectrum. This is because of two primary reasons: 1) the control premium associated with you cashing out all of your equity today vs. retaining some for future upside and 2) the potential cost and/or revenue synergies that the strategic acquirer will (partially) compensate you for. Below strategic acquirers usually sits majority recap oriented private equity firms. These are firms that are looking to purchase 51% to 75% +/- of the equity in your business in order to incentivize management to remain with the business as an active participant in order to realize the “rolled equity” upside. That said, the valuation spectrum within this buyer cohort can vary wildly. Some PE firms are “value” buyers and so are looking to come in at a modest multiple but may be willing to look past challenged metrics. Other PE firms are “premium” bidders but will tend to only pursue businesses with top quartile level metrics across the board. Generally speaking, the lowest on the valuation ladder will be minority-oriented growth equity firms. These firms are looking to own <50% of the equity and so tend to be a bit lower on headline valuation given the lack of ability to steer the direction of the business with majority control. The caveat to this cohort is that some of these firms will look to boost headline valuation by embedding significant structure (e.g. participating preferred) which can become egregiously detrimental to common equity in a downside scenario. This is especially true for venture capital firms who gravitate towards extremely fast growers in big total addressable markets (“TAMs”) vs. the more conservative growth equity firms.

What Market Are You Operating In?

Again, generalizations will apply here but generally speaking big TAMs, plus lots of “greenfield” (jargon meaning how much competition exists today), plus “mission critical” software equals a higher valuation. The dream scenario is a software company operating in a huge, horizontal market where Excel still dominates and the software would be last IT spend line item the CTO would turn off. At the other end of the spectrum would be a software company operating in a very narrow, verticalized niche where there’s a myriad of options and the software is highly discretionary spend that could be prone to being turned off in a downturn (think of martech for chiropractors). As always, there can be caveats. Take the CPA end-market. Until recently it was considered quite niche and so software businesses often struggled to attain premium valuations. That has changed dramatically as investors have realized the market dynamics are extremely favorable in terms of a) underdigitization (think of the Excel is still highly prevalent across workflows point), b) struggling with lack of reasonably priced labor as CPAs are getting older (software is needed to do more with less), c) the retention metrics tend to be very strong (CPAs don’t tend to want to switch away from a software product once its embedded into their workflows) and d) tax and accounting workflows are static, rules-based workflows and so perfectly suited to AI. But again, this is the exception to the rule. Beyond the generalizations discussed above there are other market specifics that can influence valuation as well such as regulatory risk, geopolitical risk, ability for well-funded incumbents in adjacent markets to easily compete, and the existential threat from GenAI to erode pricing power.

Who is Your ICP (Ideal Customer Profile)?

Generally speaking, the larger the customer or average contract value (“ACV”) the higher the valuation and so SMB-focused businesses tend to trade for lower multiples than enterprise-focused businesses. This is due to four primary factors: a) larger businesses tend to be more stable and so there is less idiosyncratic risk to each customer churning due to poor performance, b) SMBs may outgrow the software and so require a more complex solution leading to more churn, c) larger businesses spend more on IT generally and so there is more opportunity to gain share of wallet, and so d) relatedly, larger businesses usually have a much higher customer liftetime value (“LTV”) vis-a-vis their customer acquisition cost (“CAC”). You often here software investors talk about LTV / CAC ratios. This is arguably the single most important metric related to a software business’s unit economics. But yet again, caveats apply. Investors may discount a multiple for an enterprise-focused business where the sales cycles are especially elongated for example. Enterprises also often require significant onboarding services and product customization which can dampen gross margin and inflate R&D expense. Another caveat is that sometimes SMB-focused businesses have powerful distribution channels that dramatically lower CAC…think of a software business that white labels its technology to a massive incumbent who facilitates customer acquisition at near zero marginal cost.

The IT Stack

This is arguably the most overlooked factor among founders. You’ve scaled a business without many technical hiccups and during diligence the investor flags “significant technical debt” as justification for haircutting valuation. It’s usually a surprise to the founder and oftentimes the investor. So what does technical debt actually mean? In the eyes of the investor it means forgone maintenance spend. To draw a rough analogy think of buying a house where you discover the plumbing and electrical needs to be brought up to code. It’s a fairly similar concept. Sure the house might have operated just fine to date but what about the next 5-6 years? Investors think of your IT stack in the same way with the added complication - how scalable is it? The IT stack that works at $5M of ARR very well may not work at $20M of ARR. Additionally, sometimes investors discover that there are 3rd party licenses that might have gone unpaid for. This also means a discount in valuation or perhaps cash at close set aside in an escrow account to compensate for the risk. Thankfully there are ways to proactively mitigate against this negative surprise such as a pre-process tech stack diagnosis or “software composition analysis”.

The Team

You’ve operated mean and lean leading to high margins…the founders have even elected to take modest salaries in favor of profits distributions….perfect for a premium valuation right? Sort of. Yes, all things being equal, profitable is better than not profitable but the team and SG&A structure that works at $5M of ARR may not be one that works at $20M+ of ARR. Investors are ultimately underwriting an exit of 3x+ your current valuation and so growth underpinned by market rate salaries is vital to get there within their investment time horizon. Growth means new hires - and often new senior hires which can be expensive. The co-founder who is operating as CFO, COO and CHRO may require a couple additional senior executives to scale leading to a lower pro-forma EBITDA margin. An investor may also perceive the need for certain team upgrades to scale to the next level which can also lower the pro-forma EBITDA margin they are underwriting to. Conversely, if the team is seasoned (i.e. has already had an exit), already built to scale, and being compensated with market rate salaries then valuation is much less likely to be impacted during diligence.

“The Comps”

You’ll hear bankers talk a lot about “comps”. What are they referring to? Comparables - whether they be the trading multiples of public companies or private market transactions’ multiples for companies that look like yours (same industry, similar product offering, similar financial metrics). Public comps are much less useful when it comes to valuing early stage software businesses due to drastically different scale and public markets liquidity (there is a bit of a private market “illiquidity discount”). Private market transactions are a therefore a much better tool. That said, it can still be hard to glean a lot of insight given the sample sizes for your particular industry are likely limited over the last couple years and going too far back in time can have a massive impact on overall market multiples (e.g. 2021 vs. 2024 transactions). And so we are of the opinion that the best comps are the financial comps over a relatively tight time window, i.e. examining private market transactions over the last 18-24 months for similarly scaled SaaS businesses with similar key performance indicators (“KPIs”) assuming the qualitative factors listed above are fairly balanced. Which leads us the SaaS KPIs themselves, discussed below.

SaaS KPIs

The below “SaaS scorecard” is a decent heuristic for where your business based upon key performance indicators (“KPIs”) that many investors / buyers focus on. KPIs generally fall into four buckets: a) growth profile, b) retention, c) unit economics, and d) optimization between growth and profitability. Certain firms will weigh some KPIs more heavily than others but the below scorecard is a good summary of the headline KPIs that carry the most weight. Founders often ask which metric has the single largest impact on my valuation. Our answer is gross retention. Why? Because gross retention is as strong a signal as there exists for ascertaining the mission criticality of the software. Obviously the other metrics listed below are important but gross retention tends to be the threshold gating KPI for many investors on whether or not they’ll even engage in evaluating a business. Also keep in mind that investors and acquirers will examine that underlying trends of the KPIs both in terms of how they are trending for the overall business over time (i.e. LTM gross retention as of Q3 vs. Q2) and how customer cohorts are trending. For instance, are logos added in Q1 2025 exhibiting better or gross retention than logos added in Q1 2024? This can reveal whether or not a company’s ICP targeting is improving or worsening. Obviously there are other KPIs that are not listed below that will also be important such as customer concentration, customer NPS score, historical pipeline conversion rate etc.). One last caveat to keep in mind is that scale also matters. I.E. all metrics being equal a $10M ARR business will likely trade higher than a $5M ARR business. We delve into more detail on select metrics below (e.g. gross retention) in other blog posts.

Conclusion

Ultimately the above should serve well as a high-level overview of some of the primary factors that impact valuation but it does tend to skew towards art more than science and so there is no formulaic way for an advisor to estimate the value of your business. That said, a good advisor should be able to provide a range estimate within ~20% of the final pricing. Beware the advisor that promises to deliver a premium valuation based upon limited data (i.e. just ARR scale, growth and profitability). It’s more complicated than that. But beyond the business profile and metrics the most important factor is a well-run process with lots of competitive tension.