What is SaaS ARR multiple?

In SaaS, the relationship between a company’s worth through valuation and its annual recurring revenue (ARR) is determined by the ARR Multiple. This statistic may be used to determine a private SaaS company’s estimated worth.

In SaaS, the relationship between a company’s worth through valuation and its annual recurring revenue (ARR) is determined by the ARR Multiple. This statistic may be used to determine a private SaaS company’s estimated worth.

How a company’s annual recurring revenue compares to its valuation is primarily assessed using the ARR Multiple. It’s determined by dividing a business’ valuation by its annual recurring revenue.

Revenue and growth are only two of the many elements that investors consider when valuing businesses. You can obtain a decent idea of how a firm has incurred its valuation premised on ARR by determining the ARR Multiple. For publicly traded SaaS firms, the median ARR Multiple is 17X, with the 75th percentile circling around 26X. Public cloud businesses often vary from 4X to 9X.

The primary goal of tracking a business’s ARR Multiple is to determine the amount that an investor would be ready to invest or stake in the business in relation to the existing level of recurring revenue. Track the Growth in ARR Multiple since the previous raise to see how this measure develops after raising money.

ARR multiple formula

The ARR multiple can be calculated using the formula below:

ARR Multiple Formula

Let’s understand how to calculate ARR Multiple in detail.

How to measure ARR multiple

Divide the company’s worth by the annual recurring revenue (ARR) for that time period to arrive at an ARR Multiple.

ARR, or annual recurring revenue, is a measure that depicts the revenue generated annually during the course of a contract or subscription. ARR is, more particularly, the amount of the term subscriptions for a company’s recurring revenue adjusted for a full calendar year.

ARR is a reliable indicator of a subscription business’s health. ARR facilitates monitoring business development and forecasting future growth since it represents the revenue amount that a firm anticipates repeating. It’s also a helpful indicator for gauging the momentum of new sales, renewing subscriptions, and upgrades, as well as the momentum lost to things like downgrades and lost clients.

Investors think that ARR provides a “big picture” perspective of revenues and, as a result, gives a better, more complete image of the state of the SaaS industry. It is a key factor in determining a business’s valuation.

When calculating the ARR multiple, one should be aware of different elements that affect valuation and, in turn, determines ARR multiple. Some elements that influence a company’s valuation include:

  • Churn or attrition– the amount lost from the users who discontinue their membership with the business
  • Customer acquisition cost (CAC) – the amount spent on bringing in new customers
  • Lifetime value – an estimate of the typical revenue a client will produce over the course of their relationship with the business.
  • Competition – similar business in the same space
  • Year over year (YoY growth rate) – fluctuations in the annual revenue
  • Scalability – a kind of growth where income rises more quickly than resources are added

Many other factors play a big role in the valuation of the company. Hence they also play a role in determining ARR multiple.

Let’s understand the ARR calculation using the formula with an example.

ARR multiple examples

Assume a company, ABC, is valued at $100 million. At the time of the valuation, the ARR calculated was $10 million. Then, ARR multiple can be calculated with the formula below:

ARR Multiple = The Valuation of the Company / Annual Recurring Revenue (ARR)

Here, the valuation of the company = $100 million.
Annual Recurring Revenue (ARR) = $10 million.
Therefore, ARR multiple = $100 million / 10 million = 10 times.

Let’s try another example. Say professional values a company named XYZ at $98 million. In the past year, the total recurring revenue amounted to $8 million. Then, ARR multiple can be calculated with the formula below:

ARR Multiple = The Valuation of the Company / Annual Recurring Revenue (ARR)

Here, the valuation of the company = $98 million.
Annual Recurring Revenue (ARR) = $8 million
Therefore, ARR multiple = $98 million / 8 million = 12.25 times

Calculator

ARR multiple

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