EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples are increasingly being used to value SaaS companies, especially as the industry matures and more businesses achieve profitability.
Here's an overview of EBITDA multiples for SaaS companies today:
Current EBITDA Multiple Ranges
EBITDA multiples for SaaS companies vary based on several factors, including company size, growth rate, and specific industry segment. Generally, the ranges are as follows:
- 1st quartile: 13.2x
- Median: 23.7x with median deal size of $112M
- 3rd quartile: 43.8x
These multiples can vary significantly based on the specific SaaS sector.
Factors Influencing EBITDA Multiples
Several factors can impact the EBITDA multiple for a SaaS company:
- Growth Rate: Companies with higher growth rates typically command higher multiples.
- Profitability: Consistent and improving profitability can lead to higher multiples.
- Market Position: Leaders in their niche often receive premium valuations.
- Customer Retention: High net revenue retention (NRR) can positively influence multiples.
- Scalability: Companies with highly scalable models may see higher multiples.
When to Use EBITDA Multiples
EBITDA multiples are particularly useful for:
- More mature companies with established profitability
- Services or tech-enabled services companies with low gross margins
- Businesses with annual recurring revenue (ARR) above $15 million
- Companies where current earnings are a good proxy for future cash flow
Limitations of EBITDA Multiples for SaaS
While EBITDA multiples are valuable, they have limitations for SaaS valuations:
- They may undervalue high-growth companies that are reinvesting heavily in expansion.
- They don't capture the full value of recurring revenue models.
- They might not adequately reflect the long-term potential of early-stage SaaS businesses.
Combining EBITDA with Other Metrics
Many investors and acquirers use EBITDA multiples in conjunction with other valuation methods for a more comprehensive assessment. For instance, they might use:
- Revenue multiples for faster-growing companies
- A combination of ARR and EBITDA multiples to account for both subscription and service revenues
Venero can help calculate your company's metrics
EBITDA multiples provide a useful framework for valuing more established SaaS companies. However, it's crucial to consider them alongside other metrics and company-specific factors for a holistic valuation.
At Venero, we understand it’s a complex process, which is why we are here to help. Our team leverages 35+ years of experience in M&A advisory services to prepare our clients for a liquidity event now or down the road. If you have any questions about the metrics that will drive the valuation of your business or about how to calculate retention KPI's, EBITDA or the appropriate normalization add-backs, please contact our team.
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