There are multiple ways of valuing a SaaS company and one of the methods is ARR multiple method.
ARR multiple method is defined as:
Valuation = ARR x Growth Rate x Net Revenue Retention x 10
ARR (Annual Recurring Revenue): ARR is the recurring revenue on an annual basis that a company expects to receive from its customers for providing them with products or services. ARR can be further broken down as:
ARR added from new customers
ARR added from renewals from current customers
ARR added from upgrades from current customers
ARR lost from downgrades from current customers
ARR lost from churned customers
2. Growth Rate : ARR growth rate, which is calculated;
Growth Rate = ARR for current period / ARR for previous period -1
3. Net Revenue Retention (NRR): NRR measures the recurring revenue generated from a customers cohort over a set period, 12 months in our case.
NRR = (Starting ARR + Expansion ARR - Contraction ARR - Churn ARR)/Starting ARR
For Example: If a SaaS company has $5 Million ARR, 60% ARR growth rate and good NRR of 120%, then, the valuation will be:
Valuation = 5*60%*120%*10 = $ 36 Million at 7.2x ARR multiple
Adjustment: The valuation can be adjusted as per the gross margins of then business compared to average gross margins of 75% for SaaS businesses. The valuation can be adjusted upwards for gross margins >75% and downwards for gross margins <75%.
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