The Science Behind Your Valuation Multiple – And How to Get It Right

Forget everything you know about multiples. At least for the duration of this article.

What you’re about to read many founders only learn after a fruitless market exercise or candid conversation with our M&A team. Multiples are more than just numbers; they say as much about you as they do about your business.

You’d be surprised how many founders chose a multiple because “it just felt right”. Or they copied the outliers reported in the press. Or they believed the choice between applying a multiple to revenue or profit was whichever gave the higher valuation. Even our multiple reports are just a baseline to be adjusted.

Choosing the right multiple for your valuation requires more than instinct or averages. It requires a deep understanding of market trends, business positioning, and acquisition goals. Otherwise, you can’t build a convincing case for your valuation, which repels buyers, making it much harder to exit at your goal price.

In other words, choose your multiple carefully – be scientific about it. Consider all the factors influencing the multiple and under what circumstances you might go above (or below) market averages. Only then are you ready to market your business to buyers and secure the outcome you want. Explore how below. 

What Are Your Acquisition Goals?

Before you get stuck into determining a multiple for your valuation, ask yourself what’s on the table. What kinds of offers would make you comfortable and confident about virtually shaking hands with a buyer?

Think of everything that comes into play: 

  • How much cash do you need?
  • How quickly do you want to sell?
  • Would you accept an earnout or other conditional holdback?
  • Would you offer seller financing, and if so, how much?
  • What do you plan on doing after your acquisition closes?

Your answers influence the possible deal structures you might accept, which allows your M&A advisor to better estimate a range of potential offers, from low to high. That way, you aren’t reliant solely upon the baseline averages found in our multiples report.

Quick SaaS Case Study

I recently helped a founder sell a SaaS business that they’d run for five years and was now drawing time away from other projects. They wanted a quick sale, so we aggressively priced at the lower end of their acceptable multiple range for a swifter exit with more cash at a closing and a shorter transition. 

What’s Special About Your SaaS Business?

Now you know your goals and the deal structures on the table, next identify what’s special or unique about your business. In my experience, businesses justifying a higher-than-average multiple are in a unique, niche, or novel space. Or, they own proprietary intellectual property or some other asset that’s extremely difficult to replicate or obtain. For example, if you dominate your vertical with few competitors.

However, uniqueness and novelty have a short shelf life. Once competitors arise and tech becomes more accessible, expect downward pressure on your multiple. Take the recent AI boom. Five years ago, you might’ve dominated the space and justified a higher multiple. Today, however, it’s a very competitive market. Your business is a commodity when up against hundreds or thousands like it. 

When to Justify a Higher Valuation Multiple

You’ve Built or Own Proprietary Technology

All SaaS businesses, including yours, are technology businesses. The more exclusive and useful that technology, the more valuable it is to investors. For strategic buyers, for example, it can make more sense to acquire your assets rather than spend years and millions of dollars building and marketing similar technology.

Likewise, for financial buyers, proprietary technology is harder to replicate, costs less to run, and offers potential licensing opportunities. All of which protects or grows the financial performance of your business, which delivers bigger returns to the buyer and their investors in the long term. 

Your Business Has Been Operating for Over Three Years

Buyers love businesses that have been trading for years. Why? It shows tenacity, longevity, and the potential for future returns. If your business has been trading for five or more years, for example, it’s survived extreme macroeconomic challenges like Covid, high inflation, and geopolitical instability. That resilience reassures buyers that your business is sound and capable of weathering storms. 

Even if you only recently acquired the business, if the financial history from inception and throughout your tenure looks good, buyers may pay a higher multiple for it. Any business that thrives under different leadership is a winner given the competing strategies consecutive owners apply. In short, it shows that the business is flexible, agile, and a great acquisition opportunity for virtually any buyer.

Churn Is Low and Customer Lifetime Value High

Recurring revenue tells only half the story of your performance. If your customer churn is low and lifetime value high, your product is sticky. A sticky product reduces acquisition risk for buyers and is a license for them to experiment with marketing, operations, or research and development in pursuit of returns. This can help justify a higher multiple, though you might need a quality of earnings report to build your case. 

Your Customers Include Big Brands

Count well-known brands among your customers? Buyers will pay a higher multiple for businesses with big names that open doors to new partnerships. That said, watch out for customer concentration risk. If you only have five enterprise clients and lose two, you’ve lost 40 percent of your business. That’s a big risk, and the buyer will likely push the multiple lower or not make an offer at all. 

Defending Against Customer Concentration Risk

How long are your contracts? Can you extend them before you take your business to market? Maybe conduct some customer interviews to get feedback on what they’d like to see in the product roadmap. Discover the features and benefits that clients would renew for and pass this intel to the buyer. 

When to Apply the Multiple to Profit or Revenue

The choice between applying a multiple to profit or revenue depends on the financial performance of your business. Most buyers on look at your profit first, your growth rate second, and your revenue third. The reported multiple averages don’t work for low-to-no-profit businesses. For example, if TTM revenue is $500k and TTM profit is $50k, the most common profit multiple range would result in an asking price of between $150-250k. The numbers just don’t make sense, so you’d default to a revenue multiple. 

A revenue multiple is also more appropriate when your growth rate is high and margins low because you’re reinvesting profits into growth. But tell the story behind the numbers. Share a recast of your financials or include addbacks demonstrating how you’ve prioritized growth over profits. Don’t leave buyers guessing why your profit or growth rate is low – get ahead of the issue by being honest.

How to Justify Your Valuation Multiple to Buyers

Prepare Valuation Evidence Before Going to Market

Say you get a great offer for your SaaS business. The LOI comes in at the right price and terms, and you’re excited to move into final negotiations. But wait – there’s a problem. The buyer has asked you to explain an anomaly in your P&L. You shuffle through documents trying to find answers and come up short. The buyer cools off and pulls their offer. Deflated, you’re now back to square one.

Now contrast this with you working with our M&A experts on refining a multiple range that achieves your goals. We help you isolate and explain the anomaly in your P&L using additional financial documents (maybe it’s a recast adding back a marketing campaign that doubled your current growth rate). You explain this to the buyer during initial talks, and when that offer comes in, it moves swiftly to closing.

The above examples demonstrate the importance of preparation when justifying your multiple. Without preparation, you may lose the offer and have to restart your acquisition with another buyer, adding weeks to your acquisition, or have to accept a lower multiple, leaving cash on the table.

Use Screenshots and Official Documents to Support Your Numbers

Connecting your metrics is just one way of showcasing your performance. If you also have a dashboard showing paying subscribers, upload a screenshot to your supporting documents. At a minimum, you need a 12-month profit and loss (P&L) statement split by month. A Google or Excel sheet is preferable, not a PDF, so potential buyers can adjust the data and run financial models from your current numbers.

Choose a Valuation Multiple That’s Competitive 

Use our multiple reports to establish a range at which similar startups get acquired. Work with your acquisition expert or M&A advisor to refine that range according to the deal structure, transition period, post-acquisition plans, and so on. Then set your asking price strategically to maximize interest.

Strategic pricing means drawing as many buyers to the table with a competitive valuation. Want to know a secret? Few, if any, startups actually sell at their listed price. While competing bids might push your price higher, an all-cash offer can make a lower price seem very attractive. What’s better: $5 million in your bank now or $7 million in three years subject to various performance and financing conditions?

Why you’re selling will also influence how you justify the multiple. If you need a fast exit due to health or other life events, consider using a multiple below current market expectations to find the ideal buyer fast.

When a Lower Valuation Multiple Matters: Time and Cash

I worked with a founder recently who wanted to invest in commercial real estate. He’d already committed to investing and now needed to sell one of his businesses to finance the deal. During our first call, the founder said, “I know my business is worth more, but I need this amount of cash within sixty days to meet the deadline for closing on my real estate transaction.” Sixty days is an aggressive acquisition timeline. 

I said, “Okay, your financials look good, churn is low, your business has been operating for four years, and client concentration is low. If you had time, I think we could get you a higher multiple, but given the deadline, let’s price lower than the reported averages.” The founder agreed, so we added a slew of documents to the data room and drafted a deal schedule to keep everyone accountable to the deadline.

Within the first week, the founder received over 100 NDAs from buyers interested in his full listing. That’s double what we’d expect in the first two weeks. The conversation then flipped from attracting interest to managing it. How would the buyer vet all these interested parties? That’s where we helped the founder evaluate which buyers suited his business better and could close by the deadline. 

In the end, even with the shorter timeframe, the founder closed his acquisition very close to that top-line number I had in mind if we’d had a little more time. Why? We’d helped the founder generate so much interest, he was able to negotiate the price up and get a majority of cash upfront. It was the perfect example of how a lower multiple can maximize cash at closing in the shortest timeframe.

When a Higher Valuation Multiple Matters: Creative Deal Structures

If you set your asking price at a higher multiple, you risk pricing yourself out from buyers who might otherwise have made offers at closer to the middle of the reported averages. But, if you’re flexible on deal structures, you can justify pricing at a higher valuation since you’re taking on more of the buyer’s risk. has over 500k vetted SaaS buyers. That’s an enormous buyer pool. You stand an excellent chance of finding someone who’s willing to accept your top purchase price when your business checks all of their boxes. It’s a cliche, but time is money, and the faster a buyer finds a startup in which to invest, the faster they start earning a return. The right startups priced aggressively can still attract plenty of interest.

But don’t expect buyers to pay above market averages without closing conditions to offset acquisition risk. For example, you’ll likely have to offer seller financing, agree to an earnout, and stay on in some capacity for up to a year or more to transfer knowledge to the buyer and help the business meet its goals (so you get paid). If you’d prefer a clean break, price at or below market averages for an all-cash offer.

Determining the multiple at which to price your business is harder than the math suggests. The multiple itself is a composite of hundreds of factors – market, business, competition, age, performance, and many more – and tells a buyer how keen you are to sell. Approach your valuation with an open mind, lean on your acquisition advisor for guidance, and I promise you’ll close your acquisition happy and rewarded.

The content on this site is not intended to provide legal, financial, or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before entering into any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional. 

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