How to Determine the Exit Multiple for SAAS Companies
Understand SaaS valuation multiples (ARR) and how they impact your company's worth. Learn strategies to increase your SaaS business valuation by boosting revenue, reducing churn, and optimizing key metrics.
In the SaaS universe, Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are crucial. They shed light on the company’s expected income over time. Investors often lean towards MRR as it may be a more accurate predictor of impending income. This is due to constant changes in market conditions, competition, and regulations. ARR, on the other hand, presents a broader view of revenue over a year, ideal for firms with complex or seasonal subscription models.
The ARR multiple gauges the ratio between a company’s valuation and its ARR. It’s calculated in a simple way: divide the firm’s current valuation by its ARR. For example, if a SaaS company’s ARR is $5 million and it’s valued at $50 million, the ARR multiple is 10. This means investors are willing to pay ten times the company’s ARR to own a share in the company. This method is useful because it is straightforward and provides a quick snapshot of your business’s potential worth.
When planning for exits, avoid discounting annual plans to inflate ARR numbers, as it can considerably impact MRR negatively.
What are typical exit multiples for SAAS Companies?
Typical exit multiples for SaaS companies can range between 5.0x to 10.0x. For businesses valued under $2 million, the multiple typically ranges from 5.0x to 7.0x. Meanwhile, for businesses valued over $2 million, the multiple can range from 7.0x to 10.0x. However, these are general guidelines and the actual multiple may vary based on various factors, including the company’s revenue growth, profit margins, churn rate, and the age of the company. Keep in mind that every SaaS business is unique and each has its own priorities in terms of metrics and value drivers.
How to increase your SAAS business valuation?
Increasing your SaaS business valuation can be accomplished by focusing on several strategies:
1 - Boost profitability and revenues: A lot rests upon your ARR (Annual Recurring Revenue) growth and MRR (Monthly Recurring Revenue). Strong revenue generation and profitability can hike your business valuation.
2 - Reduce customer churn: Regularly assess reasons for customer churn and take steps to reduce it. Lower churn rates signal a more stable business, which can enhance your valuation.
3 - Court the right buyers: Seek out buyers who understand the SaaS model. They’re more likely to appreciate your business’s worth.
4 - Monitor key metrics: Keep a close eye essential metrics like LTV (Lifetime Value), CAC (Customer Acquisition Cost), and RPE (Revenue per Employee), and work on optimizing them.
5 - Scalability: Demonstrate a pathway to manage future growth without significantly increasing operational costs to appeal to investors.
Implementing these strategies may take time, but they can significantly boost your chances of getting a higher valuation. It’s crucial to maintain a sustainable growth pace while keeping costs under control.