B2B SaaS Valuation Metrics Guide
Master the 17 key metrics that drive SaaS valuations in 2026.
2026 Edition
Your SaaS Is Worth What Someone Will Pay
That number depends on two things: growth and retention. Everything else is noise.
B2B SaaS valuations use ARR multiples for businesses above ~$2M ARR, and SDE multiples for smaller businesses. The multiple (1-10x) depends on growth rate, retention (GRR/NRR), profitability (Rule of 40), and efficiency (LTV/CAC).
The Hard Truth About Multiples
(48 closed deals)
(not the norm)
(market reality)
Most founders overestimate their multiple. The data doesn't lie. High multiples exist, but they're the exception—not the rule.
Calculate Your Valuation
Choose the method that matches your business
Which Valuation Method?
"$2M ARR" isn't a magic line. The right method depends on growth, profitability, and who's buying.
| Scenario | Method | Why |
|---|---|---|
| ARR <$500K, profitable | SDE Multiple | Too small for ARR-based; financial buyers dominate |
| ARR $500K-$2M, <30% growth | SDE Multiple | Lifestyle SaaS; financial buyer pool |
| ARR $500K-$2M, >50% growth | ARR Multiple | Strategic interest; growth justifies revenue basis |
| ARR $2M-$5M, <20% growth | SDE or Hybrid | Mature, profitable; depends on buyer |
| ARR $2M-$5M, >30% growth | ARR Multiple | Growth-stage; strategic/PE interest |
| ARR >$5M | ARR Multiple | Institutional buyers expect revenue basis |
Key insight:
The buyer determines the method. Financial buyers (individuals, search funds) use SDE. Strategic buyers and PE may pay ARR multiples even for smaller businesses—if growth and retention are exceptional.
First Question: Are You Actually SaaS?
Gross margin is the gatekeeper. Below 70%, you're not getting SaaS multiples—no matter what you call yourself.
What sub-70% gross margin signals:
- • Heavy implementation/onboarding costs
- • Significant services revenue baked in
- • Managed services components
- • Infrastructure-heavy delivery
These businesses face different buyer pools. Don't apply SaaS multiples to a services business with subscription billing.
The Multiple You Hear ≠ The Cash You Get
A 4x multiple with 40% earnout is not a 4x deal. Deal structure changes everything.
| Structure | Effective Value |
|---|---|
| All-cash at close | 100% of stated value |
| Seller financing (10-30%) | Discount 5-15% for time value + risk |
| Earnout (performance-based) | Discount 20-50% depending on achievability |
| Holdback (6-12 months) | Minor discount (5-10%) |
Real Example
Headline: 4.0x SDE ($400K on $100K SDE)
Structure: 60% cash, 20% seller note (3 years), 20% earnout
Effective value: $340K-$360K = 3.4-3.6x effective
Higher-multiple deals almost always involve complex structures. That 5x+ deal? Probably has significant contingencies.
The 17 Metrics That Matter
Quantitative (9)
- ARR Growth Rate
- Gross Revenue Retention (GRR)
- Net Revenue Retention (NRR)
- EBITDA Margin
- SDE Margin
- Rule of 40
- Gross Margin
- LTV/CAC Ratio
- Customer Concentration
Qualitative (8)
- Revenue Model
- Type of SaaS (Vertical vs Horizontal)
- Delivery Model
- Market Activity
- Enterprise Readiness
- Customer NPS
- Team Composition
- Growth Potential
Quick Reference
| Metric | Formula | Low | High | Impact |
|---|---|---|---|---|
| Growth & Scale | ||||
| ARR Growth Rate | (Current ARR - Previous ARR) / Previous ARR | <25% | >50% | ●●●●● |
| Rule of 40 | Growth Rate % + EBITDA Margin % | <20 | >60 | ●●● |
| Retention & Stickiness | ||||
| Gross Revenue Retention | (Beginning ARR - Lost - Contraction) / Beginning ARR | <70% | >95% | ●●●●● |
| Net Revenue Retention | (Beginning ARR + Expansion - Lost - Contraction) / Beginning ARR | <85% | >110% | ●●●●● |
| Customer Concentration | % of ARR from Top 10 | >50% | <10% | ●●● |
| Profitability | ||||
| EBITDA Margin | (EBITDA) / Total Revenue | <0% | >30% | ●●●● |
| SDE Margin | (EBITDA + Owner Adjustments) / Revenue | <20% | >35% | ●●●● |
| Gross Margin | (Revenue - COGS) / Revenue | <60% | >90% | ●●●● |
| Efficiency | ||||
| LTV/CAC Ratio | (LTV) / (CAC) | <2x | >10x | ●●● |
| Qualitative Factors | ||||
| Revenue Model | N/A | One-time | ARR | ●●●● |
| Type of SaaS | N/A | Horizontal | Vertical | ●●●● |
| Delivery Model | N/A | On-Premise | Pure SaaS | ●●● |
| Market Activity | N/A | Low | High | ●●● |
| Enterprise Readiness | N/A | Not Possible | Proven | ●●● |
| Customer NPS | N/A | <30 | >70 | ●●● |
| Team Composition | N/A | Key Person Risk | Experienced | ●●● |
| Growth Potential | N/A | Low | High | ●●●● |
Impact: ●●●●● Critical | ●●●● High | ●●● Medium
Churn Expectations by ACV
Higher price = higher expectations. A 3% monthly churn rate that's "fine" for self-serve is a dealbreaker for enterprise.
Math check: 3% monthly churn = 31% annual churn. That means you're replacing a third of your customers every year just to stay flat. For most buyers, that's a red flag.
Cohort Data: Where the Truth Hides
New customers haven't proven sticky. 12-month retention ≠ 36-month retention. Buyers know this.
| Cohort Data Available | Buyer Confidence |
|---|---|
| 3+ years, stable or improving | High confidence; full multiple |
| 2 years, stable | Standard confidence |
| 12-18 months only | Reduced confidence; wider range |
| <12 months | Major uncertainty; significant discount |
Red flag to watch for:
Businesses showing great "annual retention" but no cohort breakdown may be masking early cohort degradation with new customer growth. When growth slows, the churn becomes visible. Smart buyers dig into this.
Platform Risk: The Hidden Discount
Built on Shopify? Salesforce? Slack? Your valuation carries platform risk whether you like it or not.
What can kill your business overnight:
- • API changes or deprecation
- • Platform launches native feature
- • Policy changes (app store rules)
- • Fee increases that destroy margins
Multiple adjustment by dependency:
Examples: Shopify apps, Salesforce ISV, Slack apps, browser extensions, WordPress plugins
Understanding Each Metric
ARR Growth Rate
Formula
(Current ARR - Previous ARR) / Previous ARR Primary indicator of momentum. 50% at $20M ARR > 50% at $2M.
Gross Revenue Retention
Formula
(Beginning ARR - Lost - Contraction) / Beginning ARR Revenue retained from existing customers. Max 100%.
Net Revenue Retention
Formula
(Beginning + Expansion - Lost - Contraction) / Beginning NRR >100% = growth without new customers.
EBITDA Margin
Formula
EBITDA / Total Revenue Profitability metric. Balance with growth rate.
SDE Margin
Formula
(EBITDA + Owner Compensation Adjustments) / Revenue Essential for sub-$2M ARR exits.
Rule of 40
Formula
Growth Rate % + EBITDA Margin % Combined growth & profit. Target 40+.
Gross Margin
Formula
(Revenue - COGS) / Revenue Core profitability indicator.
LTV/CAC Ratio
Formula
Customer Lifetime Value / Acquisition Cost Unit economics. Target 3:1 minimum.
Customer Concentration
Formula
% of ARR from Top 10 Customers Risk metric. High concentration = higher risk.
How It Works
Valuation = ARR × Multiple For businesses $2M+ ARR. Multiple ranges from 1.5-10x based on growth and retention.
Valuation = SDE × Multiple For businesses under ~$2M ARR. Multiple ranges from 3-10x based on quality factors.
ARR Multiple Ranges
The Compounding Effect
Negative factors don't add—they multiply. Two 20% risks don't equal 40% reduction. They compound to 36% (0.8 × 0.8 = 0.64). This is why businesses with multiple issues trade at steep discounts.
10 Valuation Mistakes That Cost Founders Money
Every one of these is common. Every one is avoidable.
FAQs
What is the most important metric for SaaS valuation?
Growth rate. Nothing else comes close. 100% YoY growth commands 2-3x the multiple of 20% growth. If you can only optimize one thing, optimize growth.
What is the Rule of 40?
Growth rate + EBITDA margin should be ≥40%. It's the balance check. A 60% growth company at -20% margin = 40. A 20% growth company at 20% margin = 40. Both are healthy. Each 10-point improvement correlates with ~2.2x multiple increase.
What is a good NRR?
>100% is the gold standard—it means you grow without adding new customers. But context matters. SMB: 90-100% is acceptable, 105%+ is excellent. Enterprise: 110-125% expected. Best-in-class public companies: 130%+. Don't compare your SMB product to Snowflake's 158% NRR.
What are current SaaS valuation multiples?
Flat growth: 1.5-2.5x ARR. Growing with 90%+ retention: 3-6x ARR. Elite (Rule of 40 >40%): 7x+ ARR. Smaller SaaS (sub-$2M): 3-5x SDE typically. Remember: higher multiples usually come with complex deal structures.
When should I use SDE instead of ARR?
When ARR is under ~$2M or EBITDA under ~$1M, and especially when talking to financial buyers (individuals, search funds). Normalize owner pay to market rate, add back one-time costs. Strategic buyers at any size may still think in ARR terms.
What's a good gross margin for SaaS?
80%+ is true SaaS. 70-80% is acceptable. Below 70% and you're getting into hybrid territory—buyers will discount your multiple. Below 60% and you're a services business, regardless of how you bill.
How does customer concentration affect valuation?
It's pure risk. If one customer leaving tanks your business, buyers see that. Top 10 customers >50% of ARR? Expect -0.5x to -0.75x discount. Single customer >20%? Major red flag. Target <15% concentration in top 10.
What's the difference between logo and revenue churn?
Logo churn counts customers. Revenue churn counts dollars. If you lose 10 small customers but retain your whales, logo churn looks bad but revenue churn stays healthy. Revenue churn matters more—it's what buyers care about.
How do earnouts affect my actual payout?
Significantly. A 4x multiple with 30% earnout is really 2.8x guaranteed + 1.2x maybe. Discount earnouts 20-50% based on achievability. The higher the headline multiple, the more likely it includes contingencies.
Does platform dependency really matter?
Yes. If Shopify, Salesforce, or any platform can kill your business with an API change or policy update, buyers know it. Critical platform dependency can cost you 1.0-1.5x on your multiple. Diversify your distribution if you can.
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