Experience w/ Subscription Software Multiples?

searcher profile

January 27, 2022

by a searcher from Duke University - The Fuqua School of Business in Virginia Beach, VA, USA

What are small subscription software firm multiples these days? UIPath went public at 50x. Sounds like 10-15x is closer to reality for most... but what about when you get down to firms with less than $1M rev?

2
9
152
Replies
9
commentor profile
Reply by a searcher
from Massachusetts Institute of Technology in Houston, TX, USA
It's hard to tell as multiples are driven by several factors, not just price. Some key factors include ARR growth, Rule of 40, gross margins, customer concentration, net revenue retention, logo churn, LTV/CAC, underlying industry, and quality of people and product. While a top-tier business with $1M in ARR could be worth 5-15x ARR, a bottom-tier business of the same size will hardly hit 2x ARR.

My two cents:
- Don't assume precedent transactions are accurate because in most cases they are not: successful deals are disclosed and marketed more frequently than failed deals, which artificially increases valuations and seller expectations
- Sellers who claim their business is worth [X-Y]x ARR, where [X-Y] is a very wide range (e.g., 7-12) have no idea what their business is worth and are anchored by top-tier deals that have recently closed, regardless of whether these are comparable transactions or not
- Try bringing up valuations early on in discussions, and walk away if expectations are not meaningfully aligned

Good luck!
commentor profile
Reply by an intermediary
from New York University in Menlo Park, CA, USA
Chris- Software multiples can be all over the place. Depending on the company and where they are in their lifecycle, the business may be valued based on a multiple of revenue if a strategic acquirer can be identified. Tough to find a strategic buyer with less than $5m in ARR though. For $1m in ARR, I'd look for a 1-2x range. If the business is more mature (lacking growth >50%)) then I'd value based on a multiple of cash flow something between 5-12x. It really depends if it is in a hot sector with lots of buyer interest and how well the company is managed. Happy to talk in more detail, just DM me.
commentor profile
+7 more replies.
Join the discussion