How to Value Your Private SaaS Business in 2025

How to Value Your Private SaaS Business in 2025

In today’s dynamic software market, understanding the value of your SaaS business is crucial for making informed decisions about fundraising, M&A opportunities, or strategic planning. While public SaaS companies have transparent market valuations, private companies face unique challenges in determining their value. Here’s a comprehensive guide to help you determine what your SaaS business is worth in 2025.

Understanding SaaS Valuation Fundamentals

Unlike traditional businesses that use earnings or EBITDA-based multiples, SaaS companies are typically valued using a multiple of revenue. This approach is justified because of three unique characteristics of the SaaS business model:

1. High growth rates and the ability to scale rapidly through multi-tenant architecture
2. The disconnect between cash flow and P&L statements due to upfront annual payments and revenue recognition rules
3. Very high net operating margins that are often over 50%

Key Metrics That Drive Your Valuation

In addition to your Annual Recurring Revenue (ARR), there are three primary metrics that are important to determine the value of your SaaS company:  Annual Recurring Revenue, Net Revenue Retention, and Market Conditions.

1. Annual Recurring Revenue (ARR) Growth Rate

Your company’s ARR growth rate is the most significant factor affecting valuation. Current data shows that growth rates vary significantly by company size:

2. Net Revenue Retention (NRR)

NRR measures your ability to retain and increase revenue from existing customers. Strong retention rates indicate customer satisfaction and pricing power. Current market data shows typical NRR benchmarks by company revenue:

3. Market Conditions

Public market valuations serve as a good indicator for private company valuations. As of the June 2024, the median public SaaS company trades at 6.8x revenue, down significantly from 2021 peaks but stabilized in the 6-7x range.

Keep in mind that private SaaS companies sell roughly 4.1x revenue, a significant discount to their public counterparts. Based on the data and our market experience, but we are seeing private  SaaS companies selling at between 3x and 4.7x revenue, approximately a 40% discount to public companies.

Here are the key reasons for this valuation gap:

1. Liquidity Risk
– Public company shares can be bought and sold instantly on stock exchanges
– Private company shares are much harder to sell, often requiring lengthy deal processes

2. Information Quality and Access
– Public companies provide detailed quarterly financial reports, audited statements, and regular disclosures
– Private companies have limited transparency and less standardized reporting

3. Market Size & Scale
– Public companies are generally larger, with more established market positions
– Greater scale typically means more predictable revenue and lower operational risk

4. Professional Management
– Public companies typically have experienced management teams and established processes
– Private companies may be more dependent on founders or key individuals

Current Private SaaS Valuation Multiples

The actual multiple of revenue varies depending on the size of the business. The bigger the business, the higher the multiple.  This is called the “Size Premium”.  Based on current market data, here are the median valuation multiples for private SaaS companies by size in Q4 2024:

How to Calculate Your Company’s Value

Here’s how to estimate your company’s value:

1. Start with your current ARR
2. Calculate your trailing twelve-month growth rate
3. Measure your net revenue retention
4. Apply the appropriate multiple to your ARR based on your company’s size
5. Adjust the multiple based on company-specific factors.  For example, if your NRR is below industry averages, then lower the multiple. If your growth rate is higher than industry average, increase the multiple a bit.

For example, if your company has $5M in ARR, 35% growth rate, and 102% NRR, you would apply a 4.1x multiple, suggesting a valuation of approximately $20.5M.

This type of back of the envelope will give you a ballpark sense of what your business is worth.  However, if you need a more precise valuation, contact us to learn about our valuation services.

Market Context and Timing Considerations

Several market factors currently affect private SaaS valuations and will have an impact on valuations in 2025:

• The stock markets have reached all-time highs, but this is primarily driven by large tech companies and AI-related stocks
• Traditional B2B software valuations remain well below 2021 peaks.  This suggests that valuations for B2B SaaS companies may increase in 2025.
• IPO activity remains limited, creating a backlog of companies seeking exits, which suggests an increase in the number of companies looking to exit via a private sale rather than an IPO.
• There is a significant gap between seller value expectations and buyer valuations.  We expect this gap to lessen as buyers re-assess what it will take to get a deal done.
• Private companies are showing stronger growth compared to public counterparts, which will continue to attract both public strategic buyers and private equity groups.

Maximizing Your Company’s Value

If you are still a  year or two away from a liquidity event, there are several things you can work on to maximize the value of your SaaS business.  Our advise is to focus on:

1. Sustainable Growth

• Prioritize consistent, profitable growth over unsustainable rapid expansion
• Maintain clear paths to market leadership in your niche
• Document your growth strategy and market opportunity

2. Revenue Quality

• Improve net revenue retention through customer success initiatives
• Focus on annual contracts or subscriptions plans with some upfront payments
• Build predictable, recurring revenue streams

3. Operating Metrics

• Track and improve key SaaS metrics like CAC, LTV, and gross margins
• Maintain strong unit economics
• Demonstrate operational efficiency and scaling capabilities

Current Market Dynamics

The 2024 market presents unique considerations:

• Valuations have stabilized but remain well below recent peaks
• Investors are increasingly focused on profitability and efficient growth
• The bid-ask spread between buyers and sellers remains wide
• Market uncertainty continues to impact transaction volumes
• Smaller companies show resilience in growth rates compared to larger peers

Looking Ahead

As we wrap up 2024 and look forward to 2025, several factors could impact valuations:

• Interest rate changes. We expect interest rates to continue to drop slowly over the next 12 months.
• Macroeconomic conditions and their impact on tech spending.
• Disconnect between a seller’s value expectations and what buyers are willing to pay
• Evolution of AI’s impact on software valuations.

Understanding these valuation fundamentals will help you make informed decisions about your company’s future. While this framework provides a starting point, remember that company-specific factors, market conditions, and strategic value to potential acquirers can significantly impact your final valuation. To learn more about what your business may be worth, contact us for a free, no obligation consultation.

About the Author and Jackim Woods & Co

Rich Jackim is an attorney, investment banker, and entrepreneur. For the last 30 years, Rich and his team have been providing boutique investment banking services to small and middle-market companies in over 30 industries.

In addition to running a successful M&A advisory firm, Rich founded a successful training and certification company called the Exit Planning Institute, which he sold to a private family office in 2012.

Rich is also the author of the critically acclaimed book, The $10 Trillion Dollar Opportunity: Designing Successful Exit Strategies for Middle Market Businesses.  It became an Amazon best-seller in the business consulting category the year it was published.

If you own a SaaS business and are interested in exploring your options, I would welcome an opportunity to speak with you. There is no cost or obligation to you and all discussions are completely confidential.

Feel free to contact me at 224-513-5142 or rjackim@jackimwoods.com.