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How to Calculate a Private SaaS Valuation


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When it comes to estimate the valuation of SaaS Business there are many elements to keep in consideration. Traditionally a SaaS Business is a method of software delivery and licensing in which software is accessed online via a subscription, rather than bought and installed on individual computers.

There are in particular 4x elements to take in consideration:

  1. Deal Size (ARR / Annual Recurring Revenue)
  2. Momentum (Growth Rate and CAGR)
  3. Quality of Products/Services (NRR / Net Revenue Retention)
  4. Profitability (Gross Margin)

Element #1: ARR or Annual Recurring Revenue

Annual recurring revenue (ARR) is an element showing how much recurring revenue the company can expect every year based on its subscriber base. It is calculated on a monthly base (MRR) or per year (ARR).

Here is a basic formula to calculate ARR:

ARR = (Overall Revenue fro subscription  + annual recurring revenue from other revenue streams (for example add-ons or upgrades) minus revenue lost from cancellations.

Element #2: Growth Rate

Growth rates refer to the percentage change of a specific variable within a specific time period. Growth rates can be positive or negative, depending on whether the size of the variable is increasing or decreasing over time.

Element #3: Net Revenue Retention (NRR)

NRR or Net Revenue Retention represents how revenue would change if no additional sales were made.

Below the basic formula to calculate Net Revenue Retention:

NRR = [ARR at beginning of period + Upgrades – Downgrades – Churn] / ARR at beginning of period

Element #4: Gross Margin

Gross margin equates to net sales minus the cost of service sold.

Below is the basic formula to calculate Gross Margin:

Gross Margin = [Revenue – Cost of Service Sold] / Revenue

The SAAS Valuation Formula

SaaS Valuation Formula = 10 x Annual Recurring Revenue x Growth Rate x Net Revenue Retention


Let’s say a SaaS company is generating $10M in annual recurring revenue and is growing at 70% per year with a net revenue retention rate of 110%.

The valuation comes out to $77M, 7.7x multiple.

Other factors that can be taken into account when calculating a valuation can include:

  • Quality of the Management Team
  • Value of Intellectual Property
  • CAC:LTV Ratio
  • Payback Period
  • Debts
  • Customers GEO
  • Customers Concentration
  • Market Analasys
Editorial Team
Editorial Team
Editorial Team
MergersCorp™ M&A International is a leading Lower-Middle Market M&A advisory brand, offering professional M&A services to clients across the world.

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