EBITDA Vs. ARR Multiples For SaaS
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 just like for "traditional business models" or use ARR/revenue multiples as well?
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!
Worked on a few HCIT deals this summer. ARR/Rev multiples were always used/shown regardless of profitablity. If the company met a baseline EBTIDA, we would show EBITDA multiples. Generally, growth equity firms would have us put together a bookings and attrition analysis page to complement the ARR/Rev Multiples.
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