SaaS & Recurring-Revenue Valuation

Businesses with recurring revenue — SaaS, subscriptions, memberships, service 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 more durable. This guide covers the metrics buyers scrutinize and the multiples they pay.

ARR and MRR: the foundation

MRR (Monthly Recurring Revenue) is the predictable revenue billed every month. ARR (Annual Recurring Revenue) is the annualized figure — usually MRR × 12, or the sum of annual contract values. These exclude one-time fees, so they isolate the durable base of the business. Buyers anchor valuation to ARR/MRR rather than total revenue precisely because the recurring portion is what they can count on.

Churn: the metric that makes or breaks value

Churn is the rate at which recurring customers leave. A 4% monthly churn means roughly 48% of customers are gone within a year — a leaky bucket no amount of new sales can fill profitably. 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. The LTV:CAC ratio is a health signal — 3:1 or better is generally healthy; below 1:1 means the business loses money on every customer it adds. Also watch the CAC payback period (months to recoup acquisition cost). These determine whether growth is profitable or just expensive.

The Rule of 40

A common shorthand for software businesses: revenue growth rate + profit margin should exceed 40%. A company growing 30% with a 15% margin (45) looks healthy; one growing 10% at a 10% margin (20) does not. It's a quick gut-check on whether a business is balancing growth and profitability.

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 general valuation multiples guide, and remember that a revenue multiple only makes sense when churn is low and growth is real.

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?

Plug the verified earnings into the deal calculator to model the acquisition once you've confirmed the recurring base is real.