Model the unit economics that drive a subscription business — MRR, churn-implied lifetime, LTV/CAC, CAC payback, and ARR-multiple valuation before you make an offer.
Subscription software is valued on a multiple of annual recurring revenue (ARR), but the multiple itself is set by the quality of the recurring revenue underneath it. Two businesses with identical ARR can be worth very different amounts depending on churn, gross margin, and how efficiently they acquire customers. A business with 2% monthly churn and a 4x LTV/CAC ratio deserves a premium; one bleeding 7% of customers a month does not.
The default 4x ARR multiple here is a reasonable midpoint for a profitable, slow-growth bootstrapped SaaS. High-growth or best-in-class retention businesses trade higher; declining or single-customer-concentrated businesses trade lower.
| Metric | What it means | Benchmark range |
|---|---|---|
| Monthly Churn | Share of customers lost each month | <3% healthy; 3–5% watch; >5% risky |
| LTV / CAC | Lifetime value vs. cost to acquire | >3x healthy; 1–3x thin; <1x unprofitable |
| CAC Payback | Months to recover acquisition cost | <12 mo strong; 12–18 ok; >18 slow |
| Gross Margin | Revenue after hosting and support | 70–85% typical for SaaS |
| ARR Multiple | Equity value as a multiple of ARR | 3–6x bootstrapped; higher for fast growth |
| Net Revenue Retention | Expansion vs. churn within cohorts | >100% means revenue grows without new logos |
Pull cohort retention curves, not just blended churn — a single large cohort or a recent pricing change can mask deterioration. Ask for MRR movement reports (new, expansion, contraction, churned) for the trailing 24 months so you can see whether growth is coming from net-new logos or expansion within the base. Verify revenue concentration: if one customer is more than 10–15% of MRR, model the downside of losing them. Finally, confirm the tech stack and code ownership, and that there are no critical single-person dependencies in engineering.
Customer lifetime is simply the inverse of churn: at 3% monthly churn the average customer stays about 33 months, while at 6% they stay only about 17 months — halving lifetime value for the same ARPA. Because LTV feeds directly into the LTV/CAC ratio, a small change in churn cascades through the entire model. When you negotiate price, churn is the single number most worth verifying in the data.
Use the LBO Model to layer acquisition financing on top of these unit economics and see the equity return.
An editable Excel workbook — 5-year income statement, balance sheet, cash flow, DCF + exit-multiple valuation, and a deal tab with debt schedule, IRR & MOIC. Pre-filled with the inputs above; every assumption recalculates.
A good acquisition model connects operating drivers to cash flow, debt capacity, and the price you can afford. Use this guide with the calculator to move from a seller story to a buyer-grade view of risk and return.
Seller numbers often include owner choices, one-time costs, unusual salaries, and expenses that may or may not continue after closing. Normalize earnings before applying a multiple, then document each add-back so the lender, investor, or seller can challenge it clearly.
For SaaS, normalize ARR for discounts, annual prepayments, refunds, churned customers, and non-recurring implementation fees.
The right drivers depend on the business model. For this category, pay close attention to MRR, net revenue retention, churn, expansion revenue, CAC payback, support load, infrastructure cost, and founder-led sales dependence. Small changes in those assumptions can move cash flow more than the headline revenue number suggests.
Use the calculator as a first pass, then pressure-test downside cases. A deal that only works in the base case usually needs a lower price, more seller financing, or a more conservative debt structure.
Most buyers focus on price and ignore the cash needed on day one. Inventory, receivables, deposits, payroll timing, and vendor terms can make a profitable business feel cash poor after closing.
Debt capacity should be based on durable free cash flow after owner replacement cost, taxes, capital spending, and working capital needs. If the debt service coverage ratio is thin, the deal may require more equity even if the multiple looks reasonable.
Before you issue an LOI, look for high churn, weak cohort data, unpaid customer support debt, poor documentation, one large customer, or growth that came from one temporary channel. These do not automatically kill a deal, but they should change the diligence plan and the structure of the offer.
The safest offers tie price to evidence. Use seller notes, earnouts, holdbacks, working-capital pegs, and closing conditions when the risk is real but still measurable.
Use recent comparable deals only as a starting point. The right multiple depends on durability, owner dependence, growth, margin quality, customer concentration, and how much debt the business can safely support.
Earnings and free cash flow matter most for most small acquisitions. Revenue multiples can help in software, content, and high-growth models, but they still need to reconcile to profit and cash conversion.
A buyer normally expects enough normalized working capital to operate the business without an immediate cash injection. Calculate it from historical monthly balances, not just the latest balance sheet.
Walk when the seller cannot support revenue, margins, add-backs, customer quality, or working capital with evidence. A deal that depends on trust instead of records deserves a lower price or no bid.