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Buying guide: SaaS

SaaS businesses are valued for their predictable recurring revenue. The core metrics to evaluate are Monthly Recurring Revenue (MRR), monthly churn rate, customer acquisition cost (CAC), and average revenue per user (ARPU). A low churn rate is often more important than headline revenue: a SaaS losing 5% of customers per month will shrink to half its size within 14 months regardless of new sales.

Software infrastructure matters more for SaaS than for content-based businesses. Before closing, have an independent developer review the codebase for technical debt, security vulnerabilities, and third-party API dependencies that could be deprecated or repriced. Understand the hosting costs and whether they scale linearly with customer growth.

Most SaaS acquisitions are priced at 2 to 5x Annual Recurring Revenue (ARR). Bootstrapped micro-SaaS products with under 50 customers often trade at the lower end; software with strong retention, documented processes, and a clean codebase commands the higher end.

Frequently asked questions

What metrics matter most when buying a SaaS business?

MRR, monthly churn rate, LTV:CAC ratio, and the number of paying customers. A monthly churn rate under 2% is generally strong. Also check net revenue retention: if customers expand their plans over time, NRR above 100% means the business grows even without acquiring new customers.

How are SaaS businesses valued?

Most SaaS deals price at 2 to 5x Annual Recurring Revenue (ARR). Micro-SaaS products and early-stage tools often trade between 2 and 3x ARR. Established businesses with low churn, documented processes, and no key-person dependency command multiples toward the higher end.

Should I review the code before buying a SaaS?

Yes. Even if you are not technical, hire a developer to review the codebase before closing. They should check for critical security issues, assess the quality of the architecture, identify any hardcoded secrets or deprecated dependencies, and estimate the ongoing maintenance burden.