How to Value a SaaS Business Before You Buy
Valuing a SaaS business is part art, part science. Here is the framework professional buyers use.
The 3 main valuation methods
Revenue multiple: Most common for SaaS. 2-5x typical range.
Discounted cash flow (DCF): For larger businesses with stable cash flow.
Comparable transactions: What similar businesses recently sold for.
Adjustments that change valuation
+ Premium for: High growth, low churn, recurring revenue, defensible moat.
- Discount for: High churn, customer concentration, founder dependency, technical debt.
Practical valuation framework
Step 1: Calculate base value (3x ARR for typical SaaS).
Step 2: Add premiums (up to +50%).
Step 3: Subtract discounts (up to -50%).
Step 4: Compare to comparable sales.
Sample valuation
SaaS with $300K ARR, 25% growth, 2.5% monthly churn: Base 3x × $300K = $900K. Growth premium +20% = $1.08M. Mild churn discount -10% = $972K. Fair range: $900K-$1.1M.
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