SaaS & Recurring-Revenue Valuation
Businesses with recurring revenue — SaaS, subscriptions, memberships, retainer contracts — command higher prices than one-time-sale businesses, and they're valued differently. Predictable, repeating income is worth more per dollar because it's durable. Buyers aren't just buying last year's earnings; they're buying next year's revenue before it's been earned. This guide covers the metrics that determine whether that premium is justified.
ARR and MRR: the foundation
MRR (Monthly Recurring Revenue) is the predictable revenue billed every month. ARR (Annual Recurring Revenue) is the annualized version — usually MRR × 12, or the sum of all annual contract values. Both exclude one-time fees, which is the point: they isolate the durable, contracted base. Buyers anchor valuation here rather than to total revenue because ARR is what they can actually count on repeating after they own it.
Churn: the metric that makes or breaks value
Churn is the rate customers leave. A 4% monthly churn means roughly half your customers are gone within a year. You can't grow your way out of that — new sales just go straight into the hole. Two views matter:
- Customer churn — percentage of customers lost.
- Revenue churn — percentage of revenue lost; can go negative (good) when existing customers expand spending faster than others leave.
Low churn justifies a premium multiple; high churn collapses it, because the future revenue the buyer is paying for evaporates.
Customer lifetime value and CAC
LTV (lifetime value) is the total profit an average customer generates before churning. CAC (customer acquisition cost) is what it costs to acquire one. A 3:1 LTV:CAC ratio is generally healthy — meaning each customer returns $3 for every $1 spent to get them. Below 1:1, the business is literally losing money on every customer it acquires, which growth only makes worse. Also track the CAC payback period: how many months until you recoup what you spent to acquire a customer. Long payback periods mean the business needs sustained cash to grow, even if the unit economics look fine on paper.
The Rule of 40
A standard gut-check for software businesses: revenue growth rate + profit margin should exceed 40%. A company growing 30% with a 15% margin scores 45 — healthy. One growing 10% at 10% margin scores 20 — not healthy. It won't tell you everything, but a score well below 40 on a business priced at a revenue multiple deserves scrutiny.
What recurring-revenue businesses sell for
Multiples vary widely with size, growth, and churn, but as directional ranges:
- Small, owner-operated subscription businesses — often valued on SDE/EBITDA multiples, but at the higher end of their industry range thanks to recurring revenue.
- Established SaaS with low churn — frequently 3—6× ARR, sometimes higher for fast, efficient growers.
- Slow-growth or high-churn SaaS — closer to EBITDA multiples than revenue multiples.
Compare these against the broader valuation multiples guide. And keep this in mind: a revenue multiple only makes sense when churn is genuinely low and growth is actually happening. A 4× ARR price on a business losing 30% of its customer base annually isn't a deal — it's expensive inventory.
Diligence questions specific to recurring revenue
- Show MRR/ARR by month for 24+ months — is it actually growing, or flat with churn masked by new sales?
- What's gross and net revenue churn?
- How concentrated is revenue? One customer at 30% of ARR is a major risk.
- Are contracts month-to-month or annual? Annual contracts are stickier.
- What share of "recurring" revenue is genuinely contractual vs. habitual repeat purchases?
Once you've confirmed the recurring base is real — churn verified, contracts reviewed, MRR trend validated month by month — plug the figures into the deal calculator and model the acquisition stack.
How to Apply This Guide
For SaaS targets, build the first model around revenue durability. ARR matters only if customers renew, pay on time, and can be supported profitably. Break ARR into new, expansion, contraction, churned, and reactivated revenue so growth is visible instead of implied.
Then connect the revenue analysis to post-close operations. Review hosting cost, support load, product debt, security obligations, and founder dependency. A company with attractive ARR can still deserve a lower multiple if the codebase, customer success process, or sales motion depends heavily on the seller.