What is ARR Multiple in SaaS?
The ARR Multiple is an industry-specific valuation ratio commonly used in the SaaS industry and for subscription-based companies.
The ARR multiple is calculated as the ratio of a SaaS or subscription-based company’s enterprise value (EV) to annual recurring revenue (ARR).
By measuring the ARR multiple, institutional investors and equity analysts can perform comparative analysis and estimate the relative value of SaaS companies.
How to Calculate ARR Multiple
The ARR multiple is an industry-specific valuation metric used by SaaS practitioners and institutional investors, such as venture capital (VC) and growth equity (GE) firms.
In practice, the ARR multiple is most commonly applied for SaaS companies and subscription-based providers because their revenue model is oriented around recurring revenue and securing multi-year contracts with B2B clients.
The ARR multiple formula is composed of two metrics:
- Enterprise Value (EV) ➝ The enterprise value (EV) is the total value of the company, including market capitalization, debt, and cash.
- Annual Recurring Revenue (ARR) ➝ The ARR is the predictable, recurring revenue generated by a SaaS company on an annual basis.
The step-by-step process to calculate the ARR multiple is as follows:
- Step 1 ➝ Calculate Enterprise Value (TEV)
- Step 2 ➝ Determine Monthly Recurring Revenue (MRR)
- Step 3 ➝ Multiply MRR by 12
- Step 4 ➝ Divide Enterprise Value (TEV) by Annual Recurring Revenue (ARR)
ARR Multiple Formula
The formula to calculate the ARR Multiple is equal to the enterprise value divided by annual recurring revenue (ARR).
Where:
- Enterprise Value (TEV) = Equity Value + Net Debt + Preferred Stock + Minority Interest
- Annual Recurring Revenue (ARR) = Monthly Recurring Revenue (MRR) × 12
Generally, a higher ARR multiple illustrates that investors are willing to pay more for each dollar of recurring revenue, often due to factors like higher growth rates, better profitability, or stronger competitive positioning.
However, the target ARR multiple can vary widely depending on the specific industry, company stage, and current market conditions.
The logic supporting the usage of net debt, rather than gross debt, is that the cash sitting on a company’s balance sheet could hypothetically be used to pay down debt, at any given moment.
What is a Good ARR Multiple
| SaaS Benchmark | ARR Multiple Range |
|---|---|
| High-Growth, Top-Tier Early-Stage SaaS Companies |
|
| Mid-Tier, Growth-Stage SaaS Companies |
|
| Low-Growth, Mature SaaS Companies |
|
ARR Multiple Calculation Example
Suppose we’re tasked with calculating the ARR multiple of a SaaS company with the following financial information:
- Market Capitalization (Market Cap) = $500 million
- Total Debt = $50 million
- Cash and Cash Equivalents = $30 million
- Annual Recurring Revenue (ARR) = $100 million
Given the market cap, net debt, and annual recurring revenue (ARR) assumptions, we can compute the enterprise value (TEV)
- Enterprise Value (TEV) = $500 million + $50 million — $30 million = $520 million
Since we’ve retrieved the enterprise value (TEV) and the annual recurring revenue (ARR), we can now apply the ARR multiple formula.
- ARR Multiple = $520 million ÷ $100 million = 5.2x
The SaaS company’s ARR multiple is 5.2x at the end of 2024, thereby, the company is valued at 5.2x its annual recurring revenue (ARR).
In other words, investors in the market are willing to pay $5.20 per dollar of annual recurring revenue (ARR).
