Using EBITDA multiples for SaaS companies is a tricky valuation method, because so many SaaS companies have negative EBITDA.
SaaS companies aren’t like industries that have been around for a long time that have been reasonably stable enough to value using a certain multiple metric like a sales multiple or an EBITDA multiple.
And, there are a myriad of other factors that affect the success of SaaS companies and also other metrics that are more relevant in valuing SaaS companies.
Having said that, for those who are curious about EBITDA multiples for SaaS companies, I pulled that data and here it is below.
Some methodology notes:
Companies with negative EBITDA were eliminated from the data set
Outliers with EBITDA multiples smaller than 1.0x and larger than 30.0x were eliminated from the data set
I looked up EV / EBITDA multiples for 2 sets of data: (1) public SaaS companies and (2) recent M&A transactions and investments
I wanted to compare the median EBITDA multiples for these 2 sets of data to see if they can be corroborated
Here are the findings:
As you can see from two different sets of data, the median EBITDA multiples for SaaS companies are within close range of each other.
For public companies where 95 SaaS companies were analyzed, the median EBITDA multiple is 11.7x whereas looking at recent M&A transactions, the median EBITDA multiple is 11.1x.
Before we get there, here are a few articles I recommend for measures you can use to value SaaS companies other than EBITDA multiples.
Very beautiful article. Thanks for sharing the information regarding EBITDA Multiples for SaaS Companies. It is really helpful for me. I believe SaaS is the future of online business.
Thanks for comment, Dave! All the articles pertaining to data set analyses and average multiples on this website are up to date within the last 12 months. Some articles were initially written as early as 2019, but I update them annually as especially in the last 2 years, there have been crazy fluctuations.
This number is a well-known figure in the SaaS Industry that assesses the health of your SaaS Business. The formula says that if you add together your revenue growth rate and EBITDA profit margin, and if their sum equals more than 40%, your company is healthy and doing well.
For businesses valued under $2 million, you can expect a 5.0x to 7.0x multiple. For businesses valued over $2 million, you can expect a 7.0x to 10.0x multiple.
The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a rate that's sustainable, whereas companies below 40% may face cash flow or liquidity issues.
An EV/EBITDA multiple of about 8x can be considered a very broad average for public companies in some industries, while in others, it could be higher or lower than that. For private companies, it will almost always be lower, often closer to around 4x.
The rule of 70 is a calculation to determine how many years it'll take for your money or an investment to double given a specified rate of return. Investors can use this metric to evaluate various investments including mutual fund returns and the growth rate for a retirement portfolio.
Measuring the trade-off between profitability and growth, the Rule of 40 asserts SaaS companies should be targeting their growth rate and profit margin to add up to 40% or more.
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