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.