Everything you need to understand SaaS valuations, metrics, and acquisition terminology. Essential knowledge for buying or selling a SaaS business.
Monthly Recurring Revenue
The predictable revenue a SaaS business earns each month from active subscriptions. MRR is the most important metric for valuing a SaaS business. It's calculated by summing all recurring subscription revenue, excluding one-time payments.
If you have 100 customers paying $50/month, your MRR is $5,000.
Annual Recurring Revenue
The annualized value of recurring subscription revenue. ARR is simply MRR multiplied by 12. It's commonly used for enterprise SaaS with annual contracts and is the basis for most SaaS valuations.
If your MRR is $10,000, your ARR is $120,000.
Average Revenue Per User
The average monthly revenue generated per paying customer. ARPU helps understand pricing efficiency and is used to identify upsell opportunities.
With $5,000 MRR and 100 customers, your ARPU is $50.
Net Revenue Retention
The percentage of recurring revenue retained from existing customers over a period, including expansions and contractions. NRR above 100% means you're growing revenue from existing customers without acquiring new ones.
Starting with $100K MRR, adding $20K expansion, losing $5K to churn = 115% NRR.
Gross Revenue Retention
The percentage of recurring revenue retained from existing customers, excluding expansion revenue. GRR can never exceed 100% and measures your ability to retain existing revenue.
Starting with $100K MRR, losing $8K to churn and contraction = 92% GRR.
Customer Churn Rate
The percentage of customers who cancel their subscriptions during a given period. High churn is the silent killer of SaaS businesses. A healthy B2B SaaS should have monthly churn below 3%.
If you start with 100 customers and lose 5, your monthly churn is 5%.
MRR Churn Rate
The percentage of MRR lost due to cancellations and downgrades. Revenue churn is often more important than customer churn because losing a high-paying customer hurts more than losing a small one.
Losing $500 MRR from $10,000 starting MRR = 5% revenue churn.
Lifetime Value
The total revenue expected from a customer over their entire relationship with your business. LTV is crucial for understanding how much you can spend to acquire customers.
With $50 ARPU and 2% monthly churn, LTV = $50 ÷ 0.02 = $2,500.
Customer Acquisition Cost
The total cost of acquiring a new customer, including marketing, sales, and related expenses. Understanding CAC is essential for sustainable growth and profitability.
Spending $10,000 on marketing to acquire 50 customers = $200 CAC.
Lifetime Value to Customer Acquisition Cost Ratio
The ratio of customer lifetime value to acquisition cost. A healthy SaaS should have LTV:CAC of at least 3:1. Below 3:1 means you're spending too much to acquire customers.
With $2,500 LTV and $500 CAC, your LTV:CAC is 5:1 (excellent).
CAC Payback Period
The number of months it takes to recover the cost of acquiring a customer. Shorter payback periods mean faster path to profitability. Ideal is under 12 months.
With $500 CAC, $50 ARPU, and 80% margin, payback = $500 ÷ ($50 × 0.8) = 12.5 months.
ARR Multiple / Revenue Multiple
The multiplier applied to ARR to determine a SaaS company's valuation. Multiples vary based on growth rate, churn, market size, and profitability. Typical range for micro-SaaS is 2-5x ARR.
A SaaS with $100K ARR at a 3x multiple is valued at $300K.
Seller's Discretionary Earnings
The total financial benefit a single owner-operator derives from a business, including salary, perks, and profit. SDE is commonly used for valuing smaller, owner-operated businesses.
A business with $50K profit where the owner pays themselves $80K has $130K SDE.
Earnings Before Interest, Taxes, Depreciation, and Amortization
A measure of operating profitability that excludes non-operating expenses. EBITDA is used for larger SaaS valuations and private equity transactions.
EBITDA multiples for SaaS typically range from 5-15x depending on scale and growth.
The Rule of 40
A benchmark stating that a healthy SaaS company's growth rate plus profit margin should equal or exceed 40%. It balances growth and profitability—you can grow fast with low margins or grow slowly with high margins.
A company growing 30% with 15% profit margin scores 45 (above 40 = healthy).
A small, focused SaaS business typically run by a solo founder or small team, generating between $1K-$50K MRR. Micro-SaaS products solve specific problems for niche audiences and are often bootstrapped.
A Chrome extension for email productivity with $5K MRR and one developer.
Bootstrapped Business
A business built without external funding, using only revenue and personal savings. Bootstrapped SaaS businesses are attractive acquisition targets because they're often profitable from day one.
A founder builds a SaaS to $20K MRR without taking any outside investment.
Product-Led Growth
A go-to-market strategy where the product itself drives customer acquisition, conversion, and expansion. PLG companies often have free tiers or trials that convert users to paid customers.
Slack, Notion, and Figma are famous PLG companies where users discover value before paying.
Freemium Model
A pricing model offering a free tier with limited features, with paid upgrades for additional functionality. Freemium reduces CAC but requires careful balance to convert free users.
A project management tool offers free access for up to 3 users, with paid plans for larger teams.
Letter of Intent
A non-binding document outlining the key terms of a proposed acquisition before formal due diligence. LOIs typically include price, structure, timeline, and exclusivity period.
A buyer submits an LOI offering $300K for a SaaS with 60-day exclusivity for due diligence.
Asset Purchase Agreement
The legal contract that transfers ownership of a business's assets from seller to buyer. APAs specify exactly what's being sold, warranties, and post-closing obligations.
The APA includes the domain, codebase, customer contracts, and brand—but excludes the seller's personal guarantees.
The investigation process where a buyer verifies the seller's claims about the business. Due diligence covers financials, legal, technical, and operational aspects of the business.
During due diligence, the buyer reviews Stripe data, customer contracts, code quality, and traffic sources.
Escrow Service
A third-party service that holds funds during a transaction until all conditions are met. Escrow protects both parties—the buyer's money and the seller's assets are secured until transfer completes.
The buyer deposits $200K into escrow, which releases to the seller after all assets are transferred and verified.
Virtual Deal Room / Data Room
A secure online space where sellers share confidential documents with potential buyers during due diligence. Deal rooms are typically NDA-gated to protect sensitive information.
Vaulto's deal rooms include verified metrics, documents, Q&A, and NDA management in one place.
Non-Disclosure Agreement
A legal contract that prevents parties from sharing confidential information. NDAs are signed before accessing sensitive business data during acquisition discussions.
Buyers sign an NDA before viewing customer lists, financial statements, and technical documentation.
Vaulto provides Stripe-verified metrics and NDA-gated deal rooms for transparent SaaS acquisitions.