How to value a SaaS business: ARR and profit multiples

Oscar

Six million sounds enormous. Then I wake up at night thinking: what if it's cheap?

Alex Tutor

Both feelings are normal, and neither is a number. Buyers of small subscription businesses usually start from a yearly figure and multiply it. The simplest yearly figure is ARR, annual recurring revenue: MRR × 12.

You

Why a yearly figure and not the monthly one?

Alex Tutor

Because a buyer thinks in years: how much the business will bring over the years they own it, and how soon the price comes back to them.

Nina

MRR is 165,000 this October.

Alex Tutor

Question 1

GarageDesk's MRR is 165,000 UAH. What is its ARR, in UAH?

Your answer

Units: UAH

Alex Tutor

The number you multiply by is the valuation multiple. It isn't a law of nature: it depends on the buyer, the market and the business itself.

For our exercise, take an illustrative range of 2 to 4 times ARR for a small, profitable, growing subscription business. Real deals can land outside it, so treat it as a way to think, not a price list.

You

So where does Axle's six million sit in that range?

Alex Tutor

V \approx \text{ARR} \times m_{\text{rev}} \qquad V \approx E \times m_{\text{profit}}

Value V as a multiple of ARR, or of E, the yearly owner earnings (profit before the founders' own pay). The multiples m are illustrative and depend on the buyer and the business.

Alex Tutor

Question 2

Axle offers 6,000,000 UAH in total for GarageDesk, whose ARR is 1,980,000 UAH. What multiple of ARR is that? Round to one decimal.

Your answer

Units: × ARR (e.g. 2.5)

Nina

Revenue isn't what a buyer takes home, though. Costs matter.

Alex Tutor

Right, so check it a second way, on profit. For a business run by its owners, buyers often look at profit before the founders' own pay, because the buyer decides who to pay for those roles and how much.

Nina

MRR 165,000 minus 67,000 for Martha, Ethan, tools and SMS and the accountant. Before our two salaries.

Alex Tutor

One caution: the buyer will have to pay someone to do your jobs, maybe more than you pay yourselves. That's one reason the profit multiple stays modest.

Alex Tutor

Question 3

GarageDesk's MRR is 165,000 UAH, and its monthly costs without the founders' pay are 67,000 UAH. What are its yearly owner earnings (profit before the founders' pay), in UAH?

Your answer

Units: UAH

Alex Tutor

Now both ways. For profit, take an illustrative 3 to 5 times yearly owner earnings. Compute the four ends and see where they overlap.

Oscar

Revenue gives about 4 to 7.9 million, profit about 3.5 to 5.9. They overlap between about 4 and 5.9 million.

Alex Tutor

So six million in total is a fair headline, right around the top of the overlap. The real question is how much of it is certain.

Alex Tutor

Question 4

Match each illustrative multiple with the value it gives GarageDesk (ARR 1,980,000 UAH, yearly owner earnings 1,176,000 UAH).

Pick an answer for each row. Choosing an answer that is already used moves it to this row.

2× ARR
Choose an answer
4× ARR
Choose an answer
3× owner earnings
Choose an answer
5× owner earnings
Choose an answer

You

What would push GarageDesk towards the top of the range?

Alex Tutor

Growth: 64 shops a year ago, 240 now. Churn down to about 4%. No customer too big. Written procedures and a team, so it runs without heroics. Clean books in a separate business account.

Nina

And in January about 60 shops that still pay 600 a month move to 750. That's 60 × 150 = 9,000 more MRR without a single new shop.

Alex Tutor

Exactly the kind of fact to put in front of a buyer. What pulls it down: anything that depends on one person, a messy contract, or a customer who could leave with a big share.

Oscar

So the procedures we wrote in August have a price tag now.

Alex Tutor

Question 5

Which facts about GarageDesk are likely to raise the multiple a buyer is willing to pay? Choose all that apply.

Choose all that applyShops grew from 64 to 240 in a yearWritten procedures let Martha and Ethan run daily workNo single customer or franchise brings a large share of MRRAbout 60 shops move from 600 to 750 UAH in JanuaryOnly Nina knows how the reminder rules work in the code

Alex Tutor

Back to the offer. The six million is fair; the four million at closing is only about 2× ARR, the bottom of the range. The other two depend on MRR reaching 200,000 a year after closing.

Nina

So we shouldn't argue about the six. We should argue about the split.

Oscar

Right. Six sounds nice; four is what actually lands in the bank.

Can I explain this to my wife tonight in a few sentences?

Alex Tutor

Try it. We'll draft it together.

Alex Tutor

Question 6Short answer · AI-checked task

In 4–5 sentences, explain to Oscar's family whether Axle's offer (4,000,000 UAH at closing + 2,000,000 UAH earn-out) is a fair price for GarageDesk and what the founders should negotiate. Use the numbers from this lesson.

Write your answer and get a score with feedback from our AI reviewer.

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Alex Tutor

Next time, the last lesson: the letter of intent, six weeks of checks, and the earn-out.

Alex Tutor

That’s the lesson. You answered every task — nicely done.

Next lesson: The deal