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What is an ARR multiple?

Posted on May 27, 2020 by Author

What is an ARR multiple?

ARR Multiple, which divides a company’s worth by its annual recurring revenue, is mainly used to determine how a company’s ARR stacks against its valuation. Investors value companies based on multiple factors including revenue and growth.

How do I calculate what my company is worth?

The formula is quite simple: business value equals assets minus liabilities. Your business assets include anything that has value that can be converted to cash, like real estate, equipment or inventory.

Is your SaaS business model holding your business back?

Whilst this may benefit the business growth in the short-term, it will hold your SaaS back when it comes to valuation as ARR (annual recurring revenue) is seen as less predictable than MRR (monthly recurring revenue). If you do offer annual plans, look for an MRR to ARR ratio of 5:1 to prevent your SaaS valuation from being affected.

What is a good valuation for a SaaS business?

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For businesses valued over $2 million, you can expect a 6.0x to 10.0x multiple. While the general valuation drivers above are a key consideration, it’s important to note that every SaaS business is unique and each has its own priorities in terms of metrics.

How much do SaaS companies grow each year?

The SaaS Capital data gives us a more recent look at the growth rates of various SaaS companies. Even those with the lowest revenue multiples saw growth of at least 6\%. On the other end of the spectrum, those companies with the highest revenue multiples, we see revenue growth at an average of 46\%, when outlier Zoom is left out.

How to choose the right SaaS startup for your business?

Age of your business – If your SaaS business is older than 2 years, it’ll be valued higher than a younger startup, and upwards of 3 years is preferable for most investors. This is because you’ll have a longer track record and more data to present, and any patterns of sustainability will be seen as more reliable.

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