B2B SaaS Valuation Metrics Guide
Master the 17 key metrics that drive SaaS valuations in 2025.
The complete guide to understanding what drives B2B SaaS valuations—from sub-$2M SDE-based exits to ARR-driven growth stories—with interactive calculators and real benchmarks.
Quick Answer: What Determines SaaS Valuation?
B2B SaaS valuations typically follow two tracks: Annual Recurring Revenue (ARR) multiples once you cross ~$2M ARR, and Seller’s Discretionary Earnings (SDE) multiples for smaller SaaS businesses where the founder’s salary and benefits matter. The multiple (1-10x ARR or 3-10x SDE) is shaped by:
Sub-$2M ARR: Lead With SDE
Smaller SaaS businesses are often valued on Seller’s Discretionary Earnings (SDE). Buyers look at the profit that will be available once the founder’s compensation is normalized, then apply a 3-10x multiple depending on stability, churn, and growth profile.
- •Recast the P&L by adding back owner salary, one-time expenses, and personal benefits you plan to remove post-sale.
- •Present SDE alongside ARR so buyers see both profitability and the growth trajectory.
- •Highlight retention, churn, and customer acquisition payback—they are the biggest multiple levers at this stage.
When ARR Multiples Take Over
Once recurring revenue scales beyond ~$2M ARR (or EBITDA exceeds ~$1M), the market usually transitions to revenue multiples. Growth rate, net retention, and efficiency ratios now outweigh the founder add-backs.
- •ARR < $1M: 3-4× SDE
- •ARR $1M-$2M: 3-6× SDE or 1-2× ARR
- •ARR $2M-$4M: 2-5× ARR (growth dependent)
Tip: show a bridge from SDE to EBITDA so professional buyers can underwrite both scenarios quickly.
Everything You Need to Know
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Calculate Your SaaS Valuation
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Calculator Inputs
Valuation
Multiple
Valuation Sensitivity
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The 17 Metrics That Matter
Master these metrics to understand, improve, and maximize your SaaS valuation
Quantitative Metrics (10)
Measurable, formula-based metrics that directly impact your multiple
Qualitative Factors (9)
Strategic positioning factors that influence perceived risk
Quick Reference Table
| Metric | Formula | Negative | Positive | 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% | ⭐⭐⭐⭐ |
| Gross Margin | (Revenue - COGS) / Revenue | <60% | >90% | ⭐⭐⭐⭐ |
| Efficiency | ||||
| LTV/CAC Ratio | (LTV) / (CAC) | <2x | >10x | ⭐⭐⭐ |
| Magic Number | (Qtr ARR Growth) / (Prior Qtr S&M) | <0.5 | >0.75 | ⭐⭐⭐ |
| 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 Rating: ⭐⭐⭐⭐⭐ = Critical | ⭐⭐⭐⭐ = High | ⭐⭐⭐ = Medium
Understanding Each Metric
Click any metric to learn more about its formula, benchmarks, and impact on valuation
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. Shows cash flow available to the buyer-operator.
Rule of 40
Formula
Growth Rate % + EBITDA Margin % Combined growth & profit. Target 40+.
Gross Margin
Formula
(Revenue - COGS) / Revenue Core profitability. High GRR + low GM = unsustainable.
LTV/CAC Ratio
Formula
Customer Lifetime Value / Acquisition Cost Unit economics. Target 3:1 minimum.
Magic Number
Formula
Quarterly ARR Growth / Prior Quarter S&M S&M efficiency. >0.75 = invest more.
Customer Concentration
Formula
% of ARR from Top 10 Customers Risk metric. High concentration = higher risk.
See How Metrics Affect Your Multiple
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Interactive Valuation Calculator
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Estimated Valuation Multiple
Annual Recurring Revenue
Good! You're above the Rule of 40 threshold.
Note: This is a simplified model for educational purposes. Actual valuations consider all 17 metrics, current market conditions, strategic fit, and buyer-specific factors. Consider this a starting point for understanding how metrics influence valuation.
How It All Works Together
Understanding how metrics combine to determine your final valuation
The Core Formula
Valuation = ARR × Multiple Where the multiple typically ranges from 2-10x based on your metrics
Valuation = SDE × Multiple Ideal for owner-led SaaS under ~$2M ARR. Normalize your compensation, remove one-off expenses, and apply a 3-10x multiple depending on churn, customer concentration, and growth durability.
Why Revenue Multiples?
- Predictable recurring revenue
- Scalable without proportional costs
- Growth often prioritized over profit
Multiple Ranges by Performance
⚠️ The Multiplication Effect
Critical Insight: 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).
For SDE-based deals, the same compounding applies—documented add-backs are worth more than aggressive assumptions.
Real Example: Same ARR, Different Valuations
Company A: $5M ARR → $25M (5x)
- 60% YoY Growth
- 115% NRR
- 85% Gross Margin
- <5% Customer Concentration
- Vertical SaaS
Company B: $5M ARR → $12.5M (2.5x)
- 20% YoY Growth
- 85% NRR
- 65% Gross Margin
- 45% Customer Concentration
- Horizontal SaaS
📈 2025 Market Context
Current Multiples
- $2M+ ARR (SaaS Capital Index): See live data*
- Private (Bootstrapped): 3-6x ARR
- Private (Funded): 4-8x ARR
- Sub-$2M ARR (SDE Basis): 3-10x SDE
*Check SaaS Capital Index for current $2M+ ARR multiples
Key Trends
- 🤖 AI-native: 132% NRR vs 108% legacy
- 📊 Rule of 40 impact: 1.5x per 10 points
- 🎯 Vertical SaaS: 20-40% premium
- 🧾 SDE normalization matters: clean add-backs lift multiples 0.5-1.0x
Your 30-60-90 Day Action Plan
Practical steps to improve your valuation metrics starting today
Quick Wins (Next 30 Days)
Optimization (Next 60 Days)
Strategic Shifts (Next 90 Days)
Frequently Asked Questions
What is the most important metric for SaaS valuation?
What is the Rule of 40 in SaaS?
What is a good NRR for B2B SaaS?
What is the average SaaS valuation multiple in 2025?
How do you calculate SaaS valuation?
When should I use SDE instead of ARR?
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