One of the first questions founders ask when considering a sale is "What's my business worth?" The answer depends on multiple factors, but understanding how valuation multiples work is the starting point.
The Basics: ARR Multiples
SaaS businesses are typically valued as a multiple of Annual Recurring Revenue (ARR). For micro SaaS businesses in the $1k-$5k MRR range, multiples generally fall between 2.5x and 4.5x ARR.
Quick Valuation Examples
$2,000 MRR × 12 = $24,000 ARR
At 3x multiple: $72,000 valuation
At 4x multiple: $96,000 valuation
$5,000 MRR × 12 = $60,000 ARR
At 3x multiple: $180,000 valuation
At 4x multiple: $240,000 valuation
What Drives Higher Multiples?
Not all recurring revenue is created equal. Several factors push multiples higher:
Growth Rate
Businesses growing 20%+ year-over-year command premium multiples. A growing business has momentum that a buyer can accelerate. Flat or declining businesses see discounted multiples.
Low Churn
Monthly churn under 3% is excellent for micro SaaS. Lower churn means more predictable revenue and less effort required to maintain the customer base. High churn (above 5%) significantly impacts valuation.
Net Revenue Retention
If existing customers spend more over time through upsells or expansion, that's incredibly valuable. Net revenue retention above 100% means you could stop acquiring new customers and still grow.
Customer Diversity
No single customer should represent more than 10% of revenue. Customer concentration creates risk—if that customer leaves, the business takes a major hit.
Minimal Owner Involvement
Businesses that run without daily founder input are more valuable. Document your processes and automate what you can. Buyers want to acquire a business, not a job.
What Lowers Multiples?
Be aware of factors that reduce valuation:
- Declining revenue: A shrinking business gets discounted heavily
- High churn: Constantly replacing customers is expensive
- Customer concentration: Dependence on few large customers
- Technical debt: Significant investment required post-acquisition
- Owner dependence: Business requires founder's specialized knowledge
- Competitive threats: Strong competitors eroding market position
- Unclear financials: Mixed personal and business expenses
2025 Market Conditions
The SaaS acquisition market has normalized after the frenzy of 2021-2022. Multiples are rational but still attractive for quality businesses:
- Below average metrics: 2.0x - 2.5x ARR
- Average micro SaaS: 2.5x - 3.5x ARR
- Strong metrics: 3.5x - 4.5x ARR
- Exceptional businesses: 4.5x+ ARR
Note that these ranges apply to micro SaaS with $1k-$5k MRR. Larger businesses often command higher multiples due to reduced risk and more sophisticated operations.
SDE vs. ARR Multiples
Some buyers prefer Seller's Discretionary Earnings (SDE) multiples instead of revenue multiples. SDE accounts for profitability:
SDE = Revenue - Operating Expenses + Owner's Salary + Add-backs
Typical SDE multiples for micro SaaS range from 2.5x to 4x. This approach rewards efficient, profitable businesses rather than just top-line revenue.
How to Maximize Your Valuation
Start preparing 6-12 months before you want to sell:
- Focus on retention: Reducing churn is often easier than acquiring new customers
- Diversify customers: Work to reduce concentration risk
- Document everything: Create SOPs for all regular tasks
- Clean up financials: Separate personal and business expenses
- Fix obvious issues: Address technical debt and known bugs
- Build systems: Automate and delegate where possible
The Valuation Conversation
Valuation isn't just about multiples—it's about finding a number that works for both parties. We approach every conversation with transparency about how we arrive at our offers and what factors influence our thinking.
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