How to Value and Sell a SaaS Business (feat. Empire Flippers Team)
What you need to know
Today I have a guest post from the Empire Flippers team on how to value and sell your SaaS business.
If you aren’t aware, Empire Flippers is a marketplace for buying and selling online businesses. They’ve sold over $530M worth of businesses to date (so they definitely know their stuff).
If you have a profitable SaaS business and you’re thinking about selling: this is how you do it.
Without further ado, I’ll turn it over to Empire Flippers:
Unlike traditional businesses where physical assets often determine worth, SaaS companies are valued based on different metrics, such as recurring revenue, customer retention, growth rates, and more.
Getting these numbers right matters whether you're planning to sell now or just exploring future options.
Value your business too high, and buyers will walk away. Price it too low, and you'll leave money on the table. The right valuation helps you negotiate confidently and achieve the best possible outcome.
In this guide, we'll break down how SaaS businesses are valued, which metrics matter most to buyers, and what deal structures you can expect.
Whether your SaaS business generates $100,000 in annual revenue or several million, these principles will help you understand your business's true value and position it effectively for sale.
The Current Market for SaaS Businesses
The SaaS industry is booming, and it's showing no signs of slowing down. In 2025, global spending on SaaS is expected to hit nearly $300 billion.
Software is solving problems in every corner of business, and investors are all in. In the U.S., over $4.7 billion was raised across 282 rounds in the first half of 2024 alone, with $72.3 billion poured into SaaS startups globally.
There are now over 42,000 SaaS companies worldwide, and the average business uses about 130 different SaaS tools, an 18% increase from just a few years ago. Businesses worldwide are expected to spend nearly $300 billion on SaaS products in 2025.
The best part is that SaaS is no longer just for big corporations with deep pockets.
Thanks to low barriers to entry, more founders are building successful SaaS companies from their living rooms and scaling them to seven or even eight figures, often without outside funding.
This has created a thriving acquisition market.
More companies are choosing to buy proven SaaS platforms rather than build their own from scratch, driving demand for quality SaaS businesses of all sizes.
If you own a SaaS company, this could be your ideal time to sell.
With high buyer interest and strong valuations, the key is knowing how to properly value your business, and being ready when opportunity knocks.
Understanding SaaS Business Valuation Methods
When it comes to valuing a SaaS business, choosing the right valuation method is crucial.
There are two primary approaches: SDE (Seller's Discretionary Earnings) and Revenue-based valuations. Each serves a different purpose depending on your business size and characteristics.
SDE vs. Revenue
SDE (Seller's Discretionary Earnings): For most smaller SaaS businesses valued under $5 million, the Seller's Discretionary Earnings (SDE) method often serves as a practical equivalent to EBITDA or free cash flow-based valuations used for larger SaaS enterprises.
SDE represents the total economic benefit the owner receives from operating the business, often including their salary and other personal expenses run through the business.
The formula is simple:
SDE = Net Profit + Owner's Salary + Non-essential Expenses + One-time expenses + Interest/Financing Costs + Depreciation + Amortization - Financial Income
Revenue-based Valuation: For high-growth SaaS businesses, revenue multiples sometimes make more sense than earnings-based approaches. This is especially true when the business is reinvesting heavily in growth, which can temporarily depress profits. However, this method only works if the business demonstrates strong growth potential, otherwise, investors will focus on current earnings instead.
The Valuation Formula
Regardless of which earnings measure you use, the basic valuation formula remains consistent:
The multiple reflects various risk and growth factors specific to your business.
For SaaS companies, multiples typically range from 20x to 60x monthly profit (SDE), though high-growth businesses can command even higher multiples.
When to Use Each Method?
To determine which valuation method applies to your SaaS business, ask yourself these questions:
Is the business reliant on the owner? If yes, SDE is likely appropriate.
Are revenues growing less than 50% year-over-year? If yes, SDE is likely appropriate.
Does the business generate less than $2 million in annual revenue? If yes, SDE is likely appropriate.
If you answered "no" to most of these questions, EBITDA or revenue-based valuation might be more suitable, especially if your business has a management team in place and is experiencing rapid growth.
Key SaaS Metrics That Drive Valuation
While general financial performance matters, SaaS businesses have unique metrics that significantly impact their valuation.
Understanding and optimizing these metrics can dramatically increase what buyers are willing to pay.
Churn Rates
Buyers love SaaS businesses because their revenues are a lot more “sticky” than traditional eCommerce businesses.
For this reason, buyers will often scrutinize how long typical customers stay subscribed on average: one key way that buyers evaluate this is through the churn rate metric.
Churn, the rate at which customers cancel their subscriptions, is perhaps the most critical metric for SaaS valuations.
Buyers will look at the average realized churn rate over an extended period of time (at least a year), but will also look at individual months to get a sense of whether customer churn is increasing or decreasing.
A consistently high churn signals potential problems with product-market fit, customer satisfaction, or competitive positioning.
According to Baremetrics, the average monthly churn rate across SaaS businesses is 7.5%. But it’s important to note the large variety in size of the businesses evaluated in this study.
Looking at the business we typically see on the Empire Flippers marketplace, a 7.5% churn rate would demonstrate a relatively strong SaaS business.
Typically, smaller businesses will have a higher churn rate while larger businesses have a lower churn rate.
This is because larger SaaS companies typically sell to enterprise clients. These customers are more stable: they often commit to annual contracts, spend more per account, and make longer-term purchasing decisions. That kind of customer behavior naturally keeps churn low.
Smaller SaaS companies, on the other hand, usually target small and mid-sized businesses (SMBs). These customers tend to prefer monthly billing and lower-cost plans. It’s much easier for them to cancel at any time, and they’re more likely to switch products or pause subscriptions due to cash flow issues.
So, while a 5–7% annual churn rate might be a realistic benchmark for enterprise-focused SaaS companies, smaller businesses should expect higher churn as part of the game.
It’s not necessarily a sign of failure, it’s often just the nature of the market you’re serving.
Even a small difference in churn adds up over time.
Imagine two SaaS businesses with the same growth, but one has 5% annual churn and the other 15%. After 10 years, the lower-churn business will have significantly more recurring revenue, and consequently, a much higher valuation.
Recurring Revenue
Recurring revenue makes a business much more attractive to buyers and plays an important role in the value of the business.
One of the biggest benefits of a SaaS business is that it is much easier to generate recurring revenue compared to other business models, such as eCommerce.
Here’s an example to demonstrate the power of recurring revenue:
If an ecommerce business sells 100 units, next month they need to sell another 100 units to 100 new customers in order to maintain the same level of revenue.
A SaaS business sells 100 subscriptions. If only 5% churn, they still have 95 paying customers. So next month, they only need to find 5 new customers to stay on track.
That’s the power of recurring revenue—it stacks up over time.
This compounding effect means SaaS businesses often grow faster and more sustainably than businesses that rely on one-time purchases.
Because of this, SaaS companies with strong recurring revenue and low churn usually get higher valuations when it’s time to sell.
MRR vs. ARR
We’ve established that recurring revenue is important, but how you collect that recurring revenue can also play a big role in your valuation.
Offering annual plans (often at a discount) helps with short-term cash flow and reduces churn.
But from a buyer’s point of view, monthly recurring revenue (MRR) is often more valuable. This is because MRR shows consistent customer engagement and provides more predictable income.
Steady, predictable monthly revenue is king when it comes time to sell.
Customer Acquisition Cost (CAC) and Lifetime Value (LTV)
The relationship between what you spend to acquire customers and how much revenue they generate is critical to sustainable growth.
Customer Acquisition Cost (CAC) measures the total marketing and sales expenses required to acquire one customer.
Lifetime Value (LTV) represents the total revenue you can expect from a customer before they churn.
The LTV/CAC Ratio: The ideal ratio is 3:1 or higher, meaning each customer generates three times more revenue than it costs to acquire them. This provides enough margin to cover overhead costs and generate healthy profits.
Businesses with higher ratios often command premium valuations because they demonstrate efficient growth potential.
Business Characteristics That Affect Valuations
Beyond core metrics, there are several key factors that can really shape how buyers see the value of your SaaS business.
Paying attention to these areas can help you get a higher price when it’s time to sell.
Age and Track Record
The longer a business has been operating successfully, the less risky it seems to buyers.
A business with a solid track record is less likely to be a short-lived flash in the pan or based on a temporary trend. Established businesses show stability and the ability to handle changes in the market.
SaaS businesses that are at least 2 years old are generally preferred by buyers and command higher multiples.
Owner Involvement and Technical Knowledge
Many entrepreneurs and investors don’t have coding or technical skills, so businesses that need significant technical input from the owner have a much smaller buyer pool.
While technical sophistication can be a selling point, it creates transfer risk if the buyer needs specialized skills to maintain the product.
Even buyers who do have technical skills usually want a business that runs smoothly on its own. Remember, buyers are looking for an investment, not a full-time job.
Outsourcing technical work and recurring tasks to reliable contractors or employees makes the business much more appealing to potential buyers.
Growth Trends and Scalability
Knowing when to sell is tricky.
Many sellers are hesitant to exit their business while there’s still “juice in the tank”. They believe they’ll get the best possible valuation if they maximize their growth.
This is a bad approach.
While many buyers don’t want to acquire a declining SaaS business, they also don’t want to acquire a business that has exhausted all avenues for growth.
The sweet spot is selling when your business has consistent, moderate upward growth that buyers believe they can accelerate.
Customer Acquisition Channels
How you acquire customers significantly impacts valuation:
Channel Diversity: Premium SaaS businesses don’t rely on just one method to get customers. They use a mix, like SEO, paid ads, partnerships, and more. This lowers risk and shows the product appeals to a wider audience.
Channel Defensibility: Channels that competitors can't easily replicate or outspend you on, like strong Google rankings, exclusive partnerships, or unique marketing systems, increase business value.
Conversion Metrics: High conversion rates, like turning free trial users into paying customers, show that people like the product, and the marketing is effective.
What to Expect When Going to Market
Selling a SaaS business is rarely as quick or straightforward as founders expect.
Understanding the typical timeline and process can help set realistic expectations and prepare you mentally for the journey ahead.
Typical Timeline
Selling a SaaS business typically takes anywhere from 2 to 8 months from the time you list it to when the deal officially closes.
During this time, you’ll go through several stages: marketing the business, connecting with potential buyers, answering their questions, negotiating terms, going through due diligence, finalizing the agreement, and transferring everything over to the new owner.
Smaller and more straightforward businesses usually sell faster, while larger or more complex ones can take a bit longer since there are fewer qualified buyers and more details to work through.
Deal Fallthrough Rate
There's an old adage that every deal will die at least three times before it closes.
You might talk to several buyers before finding the right fit, but don’t let that dishearten you. Deals falling through is a normal part of the process.
Deals fall through for various reasons:
Financing issues on the buyer's side
Disagreements during due diligence
Cold feet from either party
Discovery of undisclosed problems
Changing market conditions
That’s why the most successful sellers keep talking to multiple buyers. It gives you backup options if something doesn’t work out and helps you stay in a strong position during negotiations.
Deal Structures for SaaS Business Sales
When selling a SaaS business, understanding typical deal structures is crucial for setting realistic expectations and negotiating effectively.
While all-cash deals are ideal, they become less common as deal size increases.
Cash Deals vs. Seller Financing
When selling a SaaS business, the deal structure can vary depending on the size of the business:
All-Cash Deals: These are most common for smaller SaaS businesses (under $200K–$300K). The buyer pays the full amount upfront, giving the seller a clean break with no ongoing involvement or risk.
Seller Financing: For businesses worth more than $200K-$300K, buyers often ask the seller to finance part of the deal. This usually means the buyer pays 70–80% in cash upfront, and pays the outstanding amount back to the seller in pre-agreed installments over 1–3 years. This lowers the buyer’s risk and upfront cost. Being open to seller financing also creates a larger potential buyer pool for the seller.
Earnouts: For larger SaaS businesses (typically $800K+), earnouts (sometimes called performance earnouts) are common. With an earnout, a portion of the sales price is set aside and will only be paid to the seller if the business reaches pre-agreed performance benchmarks. Additional, bonus payments can also be included, tied to specific, realistic performance goals, like hitting a revenue target or maintaining a certain customer retention rate.
In uncertain markets, performance earnouts reduce the buyer's risk if the business falls apart after the sale. On the flip side, if the business does well, these earnouts can significantly increase the total payout to the seller.
Set Yourself Up for a Successful SaaS Exit
Selling a SaaS business takes more than just putting it on the market, you need to understand what buyers are really looking for and how to make your business stand out.
The good news?
There’s still strong demand for quality SaaS businesses. If your company has solid numbers and is well-run, buyers are out there and ready to pay a premium.
Just remember, the best exits start with early prep.
Ideally, give yourself 12–24 months to improve key metrics, document systems, and make your business as buyer-friendly as possible. This way, when it’s time to sell, you’ll be in the best position to get top dollar.
If you think your business is primed for a profitable exit, submit your business for sale on the Empire Flippers marketplace and come one step closer to making a life-changing exit.