A SaaS valuation is done two ways depending on where the company is: a trading company with recurring revenue is valued on that revenue times the multiple the founder or buyer enters, and a company raising money is valued by the round, the amount raised for the equity given. How are SaaS companies valued is therefore a question with two answers, and the founder needs to know which one the person across the table is using. This page works both on the hub's examples, says what moves a buyer or an investor between multiples, and points at the free startup valuation tool and the SaaS company valuation guide on this site, which do the arithmetic from your own figures with no account and publish no multiple.
How to value a SaaS company that is trading: recurring revenue times your multiple
The figure a trading SaaS company is valued on is its annual recurring revenue, the subscriptions in force at the date, and the multiple the buyer or founder enters is applied to it; a company with $600,000 of ARR at an entered multiple of 3 reads $1,800,000, at 4, $2,400,000, and the hub publishes neither. A profitable SaaS company can also be valued on its earnings, the profit plus the owner's salary and one-off costs added back, at a multiple of those, and the two methods disagree for a growing company because the revenue multiple prices the growth. The small business valuation tool on this site works the earnings method; the SaaS company valuation guide says when each is the one the buyer will use.
What moves a SaaS multiple, and why the hub publishes none
Growth rate, net revenue retention, gross margin, the concentration of the customer base and the churn each move the multiple, and the multiple is the founder's or the buyer's judgement of them, entered into the tool rather than published by it. A request for the multiple SaaS companies sell for as a figure to rely on is the one thing the hub refuses by rule, because a published multiple is an opinion signed by nobody. Valuing a SaaS company well means entering two or three multiples that bracket the honest range and reading the spread; the report tool on this site turns them into a range with a midpoint the founder can open with.
SaaS startup valuation: the round decides it
A SaaS startup with little revenue is valued by its round: the post-money valuation is the amount raised divided by the equity given, and the pre-money is the post-money less the amount raised. On the hub's example, $500,000 raised for 20% is a $2,500,000 post-money and a $2,000,000 pre-money, with the founders and earlier holders keeping 80%. The free startup valuation tool on this site works that from the round and the equity, and the SEC's Regulation D pages, linked below, describe the exemption most such rounds are sold under. The valuation is implied by the deal, not derived from the revenue, and a founder who knows the arithmetic knows what a term sheet's percentage means in dollars.
How to evaluate a SaaS company before the number
The number comes last. Before it, a buyer or an investor evaluates the recurring revenue's quality: how much is contracted, how much is monthly, what the retention is by cohort, what the gross margin is after hosting and support, how concentrated the customers are, and what the growth has been for the last eight quarters. Those are the facts that decide the multiple, and an owner who has them on one page enters a multiple with a reason behind it. The Financial Accounting Standards Board's standards, linked below, govern how the revenue is recognised on the books a buyer will read; the arithmetic that turns the revenue into a value is the tool's, at the multiple you enter.
Questions people ask about saas valuation
How are SaaS companies valued?
A trading company on its annual recurring revenue times the multiple you enter, or on its discretionary earnings times a multiple; a startup by its round, the amount raised divided by the equity given. $500,000 for 20% is a $2,500,000 post-money on the hub's example.
What multiple do SaaS companies sell for?
The hub publishes none. Growth, retention, margin, concentration and churn move it, and the tools take the multiple you enter and show the value at that multiple and at the ones either side.
Is there a free SaaS valuation calculator?
The startup valuation tool on this site works a round into pre-money and post-money, and the small business valuation tool works the earnings method, both with no account. The SaaS company valuation guide says which method the buyer will use.