SaaS Valuation Multiples: 2023 Report

Our analysts recently conducted a meta-analysis on SaaS valuation multiples, aggregating publicly available data on SaaS dealflow from Q1 2022 – Q1 2023. The table below shows the average valuation multiples SaaS companies are selling for today, broken down by the 3 most common valuation models: EBITDA, SDE, and Revenue. The data is further segmented by SaaS business type and EBITDA/Revenue/SDE range.

2023 SaaS Valuation Multiples – EBITDA

2023 SaaS Valuation Multiples – Revenue

2023 SaaS Valuation Multiples – SDE

The following sections provide further context to the data above by offering a high-level overview of the current M&A environment for SaaS companies, as well as suggestions for how to sell a Saas company in 2023. 

The 2023 M&A Market for SaaS Companies

Globally, the SaaS industry is valued at $186.6 billion in 2023, most of which are enterprises. With a CAGR of 25.25%, the industry is expected to more than triple by 2028, coming to a total of $720.4 billion. These numbers are on track with the industry’s historical expansion, having increased 7x over the last 10 years as more companies are seeking cloud-based services for their company. 

Despite its projected growth, the economic downturn of Q3-Q4 2022 has negatively affected current valuation multiples. As of Q1 2023, industry reports have projected SaaS revenue multiples at a three-year low, averaging a pre-pandemic level of ~5.5x. By comparison, Q3 2021 valuations hit a record high of 9.8x. Such a dramatic decrease is both a comment on the economic impact of global events (e.g., inflation or Russian invasion of Ukraine) as well as the volatile nature of SaaS and the tech sector as a whole. 

As the economy begins to recover, SaaS company owners seeking to sell their company are contending with several challenges: 

• Increased business-lending interest rates as a result of the bear market (from approximately 4.5% last year to nearly 10% currently)

• Massive sunk investments in company operations, leading to a difficulty in properly valuating the company’s worth

These factors contribute to the somewhat sparser M&A market of 2023. PE firms and strategics are reporting that business owners are increasingly negotiating the sale of their business through M&A advisors who are experienced with SaaS and technology. You can find a list of top M&A firms of 2023 here.

Common SaaS Valuation Models

Company valuations for SaaS companies are often a difficult process because many are unprofitable in the early stages of growth due to heavy upfront costs, intense competition, and varying business models that affect their bottom line. As a result, models that look at company earnings (ARR, YoY Growth Rate, Gross Margin) do sellers a disservice, as they typically value the company for significantly less than it is worth. 

Fundamentally, valuating SaaS companies depends on the relative size and business model of the firm. Larger companies with more than $5 million EV will likely want to focus on EBITDA, however smaller companies are more likely to benefit from alternative valuation models that take projected/potential growth into account. 

Common SaaS Valuation Models

Most companies often rely on EBITDA, however the vast growth potential and large sunk investments in growth for SaaS companies often means that SDE or revenue-based valuations are more valuable within this industry. 

Smaller companies hoping for more leverage in negotiations may want to generalize the future EBITDA of a company by comparing the revenue multiple against the target future profit margin (a company with a 6x revenue hoping for a 15% EBITDA margin would have something in the ballpark of 9x EV/EBITDA, for example). This valuation model, however, is likely to be a weaker bargaining chip as it relies on the assumptions and projected goals rather than quantifiable data. 

Selling a SaaS Company in 2023

The uncertainty that comes with the current market makes it especially difficult to properly valuate your own company—added to the emotional weight of selling your company, as well as the potential-based valuations common in SaaS, even experienced business owners can be overwhelmed. 

For those with questions, I’m happy to offer advice from the perspective of someone who has sold multiple companies to a variety of buyers. You can reach me using the address below or by using the contact page on this website.