What kind of multiples is used by buyout and growth equity investors (e.g., Hg Capital, Summit Partners, TA Associates) to value SaaS companies? Do they only rely on EBITDA multiples or use ARR/revenue multiples as well?

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You’ll look at EV/ARR or EV/Rev to some extent, but you’re not underwriting an investment just based on a multiple. You’re probably building a medium-long term operating model, exiting based on estimated terminal unit economics and associated multiples, and using the IRR to judge the financial value prop. Businesses have different duration of growth and unit economics so that’ll mean different EV/Rev valuations even if they look comparable on the surface - EV/Rev multiples are just a simplified / implied view on CF yield anyway

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EV/ARR is the “only” metric used these days, especially for subscription based companies

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Seconded on EV/ARR. You’d probably want to peg the multiple as a benchmark against rule of 40. If a company running -40% EBITDA but growing ARR bookings at 80% YoY with >$20M ARR... what will the market bear? 10x would be totally normal but the sky is the limit looking at historical vals.

That said, the EV multiples from any metric in the context of recent SaaS SPACs are going to create some interesting comps.

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Looking at the cash flow profile of SaaS companies, some might be EBITDA negative, but operating cash flow positive thanks to up-front collections on annual contracts. Besides, looking at the public market, looks like there’s a strong correlation between the ARR and the market cap; and some EBITDA multiples just sound outlandish (cf. Workday being valued > 1000x EBITDA).

Any insights would be more than welcome. Thanks!

Unlevered free cash flow

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