Saas Valuation Calculator
Saas valuation calculator tend to be higher than their traditional counterparts because they rely on recurring revenue.
Later the initial investment, the ROI can be pretty high. Additionally, many rely on cloud technologies, allowing them to scale infinitely and cost-effectively as the demand for their service grows.
How can we use this calculator?
This calculator benefits you estimate the value of your SaaS. However, it’s based on the idea that the valuation rests on two key numbers:
- Annual Recurring Revenue (ARR)
- Growth Rate
Valuation = 2 x ARR + ARR x (1+ 2.5 x Growth Rate)
Inaccurate life valuation is based on several other factors, but this formula and calculator give you some ideas on how you can evaluate your SaaS.
Annual Recurring Revenue (ARR)
- In a characteristic SaaS, a large part of the income is recurring income.
- However, in your company, you might call it Hosting or License. So to find your ARR, you must take a look at what your clients pay on an annual basis for your recurring services.
- Naturally, you will not include startup fees and project payments in this number.
Your growth rate is how your company increases the ARR on an annual basis.
- If your ARR were $100.000 at the end of 2014 and $150.000 at the end of 2015, your growth rate would be 50%.
- ARR[-1]: ARR one year ago
- ARR[now] : ARR now
- The Growth Rate = (ARR[now] – ARR[-1])/ARR[-1]
For example that is:
- Growth Rate = ($150.000 – $100.000)/$100.000 = 0.5 = 50%
- The revenue-based valuation is based on a business’s ARR.
- In traditional business, it’s the last resort, not as nuanced as other options.
- It does have some advantages when it comes to SaaS valuation because SaaS clients generate predictably recurring revenue.
- A revenue-based valuation is pertinent if your company has just achieved product-market fit and is likely to grow.
- If your company is about to enter a high-growth phase, it won’t necessarily generate a considerable profit. However, while your revenue will grow, your outgoings will build a more stable business.
- If your business isn’t growing, a revenue-based valuation won’t accurately predict future profits.
- Seller’s Discretionary Earnings (SDE) focuses on the profits made by the owner after the cost of goods and operating expenses have been deducted.
- The owner’s salary or dividends can be added back into the final number in the SDE model.
- It’s usually used for younger businesses because it highlights the true profitability of the business’s future.
For bigger businesses, you’re likely to see the EBITDA framework. For example, EBITDA is typically used for companies valued at more than $5 million ARR across the software industry.
What does EBITDA stand for?
- EBITDA attitudes for Earnings Before Interest, Taxes, Depreciation, and Amortization.
- It takes into account that owners likely have a less direct influence on the everyday running of the business, often hiring CEOs or General Managers to take their place.
- It’s profit-based: Your organization may have reached the rule of 40 or be working at a low Customer Acquisition Cost.
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Review Saas Valuation Calculator – Annual Recurring Revenue, Growth Rate, and More.