Software company valuation (SaaS)

The valuation of a software company, in particular a SaaS (Software as a Service) business, follows its own logic: value rests less on immediate profits than on the recurrence, predictability and growth of revenue. A growing software company often reinvests most of its margin in customer acquisition, so that classic earnings multiples are of little use and give way to revenue multiples.

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Practitioners reason first in terms of recurring revenue multiples, or the ARR multiple (SaaS valuation), adjusted for a set of indicators: growth rate, NRR (Net Revenue Retention), Churn Rate, the ratio of LTV – Lifetime Value to CAC – Customer Acquisition Cost, and gross margin profile. A company combining strong growth and low attrition justifies a materially higher multiple than one whose revenue stagnates or erodes.

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By way of illustration, an editor reports 4 MCHF of ARR, grows 30% and shows net retention of 110%. An ARR multiple of 5 times leads to an enterprise value of 20 MCHF, whereas a competitor stagnating at the same ARR but suffering 15% attrition would be held at only 2 times, or 8 MCHF.

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For more mature editors, valuation combines this reading with a Discounted cash flow (DCF) method based on normalised Free cash flow, once commercial investment has stabilised. In every case, financial due diligence attentive to the quality and durability of recurring revenue conditions the multiple retained.