valuation multiple
Also called: revenue multiple, profit multiple, ARR multiple
The number by which a financial figure, such as ARR or yearly profit, is multiplied to estimate a company's price. It goes up with growth, low churn and independence from the founder, and down with risks.
A valuation multiple is the number by which a financial figure is multiplied to estimate what a company is worth: price = figure × multiple. For small software businesses the usual figures are ARR (a revenue multiple) or yearly profit, often owner earnings (profit before the founders' own pay, also called SDE) or, for larger companies, EBITDA (a profit multiple).
Which figure a buyer uses depends on the business. Fast-growing SaaS companies are often priced on ARR, because today's profit understates what they'll earn. Small, stable businesses run by their founders are more often priced on profit, because that's the money the buyer will actually take home. The same company can therefore get very different-looking numbers: "3× ARR" and "5× profit" may describe the same price.
The multiple itself moves with risk and quality. It goes up with growth, low churn, a large share of annual plans, many small customers instead of a few big ones, documented processes and a business that runs without the founders. It goes down with high churn, customer concentration, messy books, dependence on one person and a shrinking market. So the practical way to raise a sale price is less about negotiating the multiple and more about improving what it's based on, a year or two before selling.
Example
In October of year 2 GarageDesk has an MRR of 165,000 UAH, so ARR = 165,000 × 12 = 1,980,000 UAH. Costs without the founders' pay are 67,000 UAH a month, so the owner earnings (profit before paying the founders) are 165,000 − 67,000 = 98,000 UAH a month, 1,176,000 UAH a year.
A buyer offers 6,000,000 UAH: 6,000,000 / 1,980,000 ≈ 3.0× ARR, or 6,000,000 / 1,176,000 ≈ 5.1× owner earnings. But only 4,000,000 is paid at closing, about 2× ARR; the rest depends on growth after the sale. For comparison, an investor offering 3,000,000 UAH for 20% implies 15,000,000 UAH for the whole company, about 7.6× ARR, but that money goes into the company in exchange for a promise of fast growth, not into the founders' pockets.
Common mistakes
- Comparing multiples on different figures. "3× ARR" and "5× profit" can be the same price; always ask "times what?"
- Borrowing multiples from headlines. Public or venture-backed companies trade at multiples small businesses rarely get.
- Comparing an investor's valuation with a buyer's cash. A paper valuation for a minority share isn't money you can take home.
- Trying to raise the multiple at the table. It's set mostly by churn, growth, concentration and founder dependence; fix those first.