SaaS (Software as a Service)

Software as a Service (SaaS) is a software delivery model in which the vendor hosts an application centrally and customers access it over the internet, typically on a subscription basis. Instead of purchasing a perpetual software licence installed on local hardware, customers pay a recurring monthly or annual fee. In the context of business acquisitions, SaaS businesses are valued primarily on the quality and predictability of their subscription revenue.

SaaS businesses are often valued at a multiple of Annual Recurring Revenue (ARR) rather than EBITDA — particularly at smaller scale — because the subscription model is treated as a proxy for future contracted cash flows rather than current profitability. Key metrics buyers focus on include Monthly Recurring Revenue (MRR), churn rate (the percentage of subscribers who cancel each period), net revenue retention (which captures expansion revenue within the existing customer base), average contract value, and gross margin. A SaaS business with low churn, high net retention, and long-term contracted customers commands a meaningfully higher multiple than one with high churn or significant month-to-month exposure.

In the Canadian sub-$50M market, SaaS businesses typically trade at 3–6× ARR depending on growth rate, churn profile, and customer concentration, though businesses with exceptional metrics or strong growth can exceed this range. Because SaaS businesses may show low or negative EBITDA while growing, standard earnings-based valuation methods can understate or overstate value depending on the stage of the business.

See also: Recurring Revenue, Customer Concentration, Enterprise Value, EBITDA.