SaaS valuation multiples for a small SaaS business: profit and ARR multiples, what moves them, what buyers check in due diligence and how to weigh an earn-out.
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A small SaaS business is usually valued with one of two SaaS valuation multiples: a multiple of either its yearly profit to the owners or its annual recurring revenue (ARR). The multiple depends on how durable and transferable that money is: low churn, steady growth, no giant customer and a business that runs without the founders push it up. The multiples in this article are illustrative, chosen to show the method, not market data; real ones vary with the year, the country and the buyer. Below is a worked valuation, the factors that move it, what a buyer will check, and how to compare an offer with an earn-out against a simpler one.
Taras and Khrystyna built PetalBook, a web app for independent flower shops: online orders, delivery routes and reminders for customers' anniversaries. After four years:
Buyers look at the profit to the owners rather than the profit after the founders' salaries, because after a sale the founders' pay becomes the buyer's choice.
A multiple of yearly profit to the owners. Common for small, profitable companies that a buyer runs for cash. With an illustrative range of 3 to 5 times:
A multiple of ARR. Common when the buyer cares more about the customer base than today's profit, for example a company that will sell its own products to those customers. With an illustrative range of 2 to 4 times:
Both methods put PetalBook somewhere around 4 to 7 million UAH, with the ARR method stretching higher for a buyer who values the customers most. Where exactly it lands depends on the factors below.
Each item is something you can improve a year before a sale. Customer concentration in particular can cut the price or turn part of it into a condition; see customer concentration. Churn and growth come straight from the monthly numbers in how to calculate MRR and churn.
Knowing which kind of buyer is in front of you tells you which number they are really looking at.
A company that sells point-of-sale software to shops offers 6,500,000 UAH:
An earn-out is part of the price paid later, only if the business hits an agreed target. The target means growing ARR from 2,112,000 to 2,500,000, or about 18.4% in a year, after the founders no longer control the company.
Weigh it by probability. If the founders think the target has about an even chance:
That's the fair comparison with a second offer of 5,200,000 UAH all in cash at closing. The earn-out offer is worth a little more on average, and much more uncertain. It also equals about 5,500,000 / 1,368,000 ≈ 4 years of today's owner profit, which is the third option to compare against: keep the company and keep taking the profit.
Questions to settle before signing an earn-out:
After a letter of intent fixes the price, the structure and a period in which you don't talk to other buyers, the buyer spends weeks checking what you told them. Prepare before any conversation:
A lawyer who reviews the letter of intent before you sign it is cheap compared with the price of a bad clause.
A sale is one of three choices, along with keeping the company for its profit or raising money to grow faster. The investor logic behind raising, and why it suits some businesses and not others, is in bootstrapping vs venture capital.
Take a measure of the money it makes, usually yearly profit to the owners or annual recurring revenue, and multiply it by a factor that reflects how durable that money is. Compare offers by their risk-weighted value, not by the headline.
It varies widely with market conditions, growth, churn and buyer type, so treat any single number with suspicion. This article uses illustrative ranges of 3–5 times yearly owner profit and 2–4 times ARR only to show the method.
Part of the sale price that's paid later, only if the business reaches an agreed target such as a level of revenue. It shifts risk from the buyer to the seller.
Often from a few weeks to two months. Having revenue by customer, contracts, code ownership and procedures ready shortens it considerably.
The lesson What the business is worth values a product for car repair shops with numeric exercises and a practice task checked by AI. The case The deal follows the same founders through a letter of intent, due diligence and an earn-out. Both are part of the course From Idea to Profitable Product: Building Without Investors.
