SaaS Valuation Framework

Simple Scorecard for SaaS < $5M ARR

I talk to 100s of SaaS founders about M&A every year. The obvious elephant in the room is always the valuation.

It turns out that founders tend to overestimate the value of their business - sometimes more, sometimes less. Of course, not every founder has the time and knowledge to create a full LBO model to see how PE buyers might look at the business.

On the other hand, the more you try to simplify the valuation approach, the less reliable it becomes. SaaS Capital even tried to break it down to a single formula (SCI = SaaS Capital Index, NRR = Net Revenue Retention).

SaaS Valuation Formula | Source: SaaS Capital

With my post, I want to focus on small SaaS companies (ARR < $5M) and find a good middle ground.

The top quantitative valuation drivers are known:

Quantitative Valuation Drivers | Source: SEG

Public SaaS multiples (currently at ~6-7x) are not a good reference. Even Private SaaS M&A Multiples (currently at ~5x) can be misleading because deals of all sizes are considered.

For smaller companies, the multiples are usually below. The report shows a more realistic picture. It is in line with my personal experience. Most of the companies we look at with are valued between 2-3x ARR.

SaaS Revenue Multiples | Source:

If we take 2.5x ARR as the mean valuation, we can create a simple scorecard with the aforementioned value drivers. The valuation of the business should lean towards the range where you tick the most boxes. You can access the Google Sheet version here.

SaaS Valuation Scorecard for SaaS <$5M ARR

As already mentioned, simplifications like this one should always be taken with a grain of salt. They apply until proven otherwise.

While quantitative factors usually have the highest weighting, there are numerous other factors that may influence the valuation.

Qualitative Valuation Drivers | Source: SEG

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