SaaS Valuations and NTM Multiples (2024)

FAQs

What are SaaS valuation multiples? ›

Revenue multiples

ARR multiples are the ratio between Annual Recurring Revenue (ARR) and company valuation. The Multiple can be found by dividing the Valuation by ARR. i.e., Multiple = Valuation / ARR. This metric is considered a great way of calculating the value of private SaaS companies.

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.

Multiples denoted as NTM means the selected metric is based on the projected performance in the coming twelve months. Therefore, a NTM multiple is considered a “forward multiple”, since the valuation is based on a forecast, rather than actual historical financial results.

There are several reasons why SaaS companies enjoy higher valuations, including: Recurring revenue they earn by charging monthly subscription/recurring fee. More predictable earnings based on their defined pricing tiers. Higher customer lifetime value from long-term contracts.

The average is 26%. SaaS businesses are healthy. There is almost no debt on these businesses as banks don't like 'asset-lite' businesses like software.

Stated simply, the Rule of 50 is governed by the principle that if the percentage of annual revenue growth plus earnings before interest, taxes, depreciation and amortization (EBITDA) as a percentage of revenue are equal to 50 or greater, the company is performing at an elite level; if it falls below this metric, some ...

The Rule of 40 is a SaaS financial ratio that compares revenue growth to profitability. It's an at-a-glance look at the performance of your business. The rule of 40 states that a healthy SaaS company has a combined growth rate and profit margin of 40% or more.

It takes into consideration growth and profit. In terms of interpreting the rule, 40% is the baseline figure where the company is deemed healthy and in good shape. If the percentage exceeds 40%, then the company is likely in a very favorable position for long-term growth and profitability.

The SaaS Magic Number is a ratio showing yearly recurring revenue growth gained for every sales and marketing dollar spent. It indicates the level of operational efficiency of a company, as well as the sustainability of sales and marketing expenditure.

Financial analysts use Last Twelve Months (LTM) or Next Twelve Months (NTM) and a number of different valuation multiples when evaluating corporate deals. In the world of M&A, relative valuation serves as one of the fastest ways of valuing a business.

What is the difference between NTM and MAC? ›

MAC is one of a large group of nontuberculous mycobacteria (NTM), and the most common cause of NTM lung disease in the U.S. MAC organisms are common in soil and water and are easily inhaled during daily activities. Most of the time they cause no harm, but they can cause infection in groups with certain risk factors.

While TB is transmitted through inhalation of aerosol droplets containing Mtb, generated by patients with symptomatic disease, NTM disease is mostly disseminated through aerosols originated from the environment. However, following inhalation, both Mtb and NTM are phagocytosed by alveolar macrophages in the lungs.

The most important SaaS KPIs are churn, monthly recurring revenue (MRR), customer lifetime value (CLV) and customer acquisition cost (CAC). These deliver essential insights into your customers, as well as your company's financial health and prospects.

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.

A healthy SaaS company should maintain an NDR of over 100% because it indicates that upgrades are outweighing downgrades and churn. Unlike NDR, Gross Dollar Retention tells you how many customers you've retained year over year without considering upgrades.

As a general rule, SaaS companies should strive for a CLV:CAC ratio of 3:1 to be profitable. Use the profit per customer formula above to determine your current ratio. For example, if the company's average CLV is $310 and the CAC is $95, that's roughly a 3:1 ratio, meaning your company is on a good profitability track.

Based on our experience, a good benchmark gross margin for a SaaS company is over 75%. Typically, most privately held SaaS businesses we work with have gross margins in the range of 70% to 85%. Anything below 70% begins to raise a red flag for us and prompts us to do a deeper dive into several other metrics.

Customer lifetime value is more valuable as a metric when you calculate its ratio to customer acquisition cost (CAC). In the SaaS industry, the benchmark for CLV to CAC ratio is greater than 3:1. This benchmark indicates a high ROI from your sales and marketing efforts.

The "optimum" SaaS Quick Ratio you'll hear banded around is 4, put forward by founders and VCs (including Mamoon Hamid) alike. They recommend a target benchmark of 4 for two reasons: To hit a Quick Ratio of 4, a SaaS company needs to be adding $4 in revenue for every $1 lost through churn or contraction.

What are valuation multiples? ›

What are Valuation Multiples? Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable. Multiples are the proportion of one financial metric (i.e. Share Price) to another financial metric (i.e. Earnings per Share).

Typically, as long as a company hits a combined score that's higher than 40, it is considered healthy and is an attractive business from an acquisition perspective. Inherent in the Rule of 40 score is the tradeoff between revenue growth and EBITDA.

In practice, the EV/EBITDA multiple is the most commonly used, followed by EV/EBIT, especially in the context of M&A. The P/E ratio is typically used by retail investors, while P/B ratios are used far less often and normally only seen when valuing financial institutions (i.e. banks).

There are three approaches to valuing a company: the asset approach, income approach, and market approach. Within each approach, there are several commonly accepted methods that the valuator may choose to employ in valuing the business.

This module examines the traditional property valuation methods: comparative, investment, residual, profits and cost-based.