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# ARR Multiple

Step-by-Step Guide to Understanding ARR Multiple for SaaS Companies

Last Updated August 16, 2024

## How to Calculate ARR Multiple

The ARR multiple is an industry-specific valuation metric used by SaaS practitioners and institutional investors, such as venture capital (VC) and growth equity (GE) firms.

In practice, the ARR multiple is most commonly applied for SaaS companies and subscription-based providers because their revenue model is oriented around recurring revenue and securing multi-year contracts with B2B clients.

The ARR multiple formula is composed of two metrics:

• Enterprise Value (EV) ➝ The enterprise value (EV) is the total value of the company, including market capitalization, debt, and cash.
• Annual Recurring Revenue (ARR) ➝ The ARR is the predictable, recurring revenue generated by a SaaS company on an annual basis.

The step-by-step process to calculate the ARR multiple is as follows:

• Step 1 ➝ Calculate Enterprise Value (TEV)
• Step 2 ➝ Determine Monthly Recurring Revenue (MRR)
• Step 3 ➝ Multiply MRR by 12
• Step 4 ➝ Divide Enterprise Value (TEV) by Annual Recurring Revenue (ARR)

## ARR Multiple Formula

The formula to calculate the ARR Multiple is equal to the enterprise value divided by annual recurring revenue (ARR).

ARR Multiple = Enterprise Value (TEV) ÷ Annual Recurring Revenue (ARR)

Where:

• Enterprise Value (TEV) = Equity Value + Net Debt + Preferred Stock + Minority Interest
• Annual Recurring Revenue (ARR) = Monthly Recurring Revenue (MRR) × 12

Generally, a higher ARR multiple illustrates that investors are willing to pay more for each dollar of recurring revenue, often due to factors like higher growth rates, better profitability, or stronger competitive positioning.

However, the target ARR multiple can vary widely depending on the specific industry, company stage, and current market conditions.

The logic supporting the usage of net debt, rather than gross debt, is that the cash sitting on a company’s balance sheet could hypothetically be used to pay down debt, at any given moment.

Net Debt = Total Debt  Cash and Cash Equivalents

## What is a Good ARR Multiple

SaaS Benchmark ARR Multiple Range
High-Growth, Top-Tier Early-Stage SaaS Companies
• 15x to 30x+
Mid-Tier, Growth-Stage SaaS Companies
• 5x to 15x
Low-Growth, Mature SaaS Companies
• Sub-5x

## ARR Multiple Calculation Example

Suppose we’re tasked with calculating the ARR multiple of a SaaS company with the following financial information:

• Market Capitalization (Market Cap) = \$500 million
• Total Debt = \$50 million
• Cash and Cash Equivalents = \$30 million
• Annual Recurring Revenue (ARR) = \$100 million

Given the market cap, net debt, and annual recurring revenue (ARR) assumptions, we can compute the enterprise value (TEV)

• Enterprise Value (TEV) = \$500 million + \$50 million — \$30 million = \$520 million

Since we’ve retrieved the enterprise value (TEV) and the annual recurring revenue (ARR), we can now apply the ARR multiple formula.

• ARR Multiple = \$520 million ÷ \$100 million = 5.2x

The SaaS company’s ARR multiple is 5.2x at the end of 2024, thereby, the company is valued at 5.2x its annual recurring revenue (ARR).

In other words, investors in the market are willing to pay \$5.20 per dollar of annual recurring revenue (ARR).

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