Research & Investment Research & Investment
Guides About

Investment Guides

Practical frameworks and checklists for evaluating SaaS and web business opportunities. From key metrics to due diligence to valuation methods.

Key Metrics Due Diligence Valuation Red Flags Business Models

Key SaaS Metrics

Understanding the numbers that matter most when evaluating digital businesses.

MRR & ARR

Monthly Recurring Revenue and Annual Recurring Revenue are the foundation of SaaS valuation.

MRR = Number of Customers x Average Revenue Per Customer
  • New MRR: Revenue from new customers
  • Expansion MRR: Upgrades from existing customers
  • Churned MRR: Lost revenue from cancellations
  • Net New MRR: New + Expansion - Churned

Churn Rate

The percentage of customers or revenue lost over a given period. Low churn is critical for sustainable growth.

Monthly Churn = Customers Lost / Starting Customers x 100
Healthy Benchmarks
  • SMB SaaS: <5% monthly churn
  • Mid-market: <2% monthly churn
  • Enterprise: <1% monthly churn
  • Annual churn: <10% is generally healthy

Customer Lifetime Value (LTV)

The total revenue expected from a customer over their entire relationship with the business.

LTV = ARPU x Gross Margin / Monthly Churn Rate

Or simplified: LTV = ARPU x Average Customer Lifespan. Higher LTV means customers are more valuable and the business has stronger unit economics.

Customer Acquisition Cost (CAC)

The total cost to acquire a new customer, including marketing and sales expenses.

CAC = (Marketing + Sales Costs) / New Customers Acquired

Include all costs: ads, content, sales team salaries, tools, and overhead. Understanding true CAC helps assess marketing efficiency.

LTV:CAC Ratio

The relationship between customer value and acquisition cost. One of the most important SaaS metrics.

LTV:CAC Ratio = Lifetime Value / Customer Acquisition Cost
Target Ratios
  • 3:1 or higher - Healthy, sustainable business
  • 1:1 to 3:1 - Needs improvement
  • Below 1:1 - Losing money on each customer
  • Above 5:1 - May be under-investing in growth

Net Revenue Retention (NRR)

Measures revenue retained from existing customers, including expansions and contractions.

NRR = (Starting MRR + Expansion - Churn - Contraction) / Starting MRR x 100
What NRR Tells You
  • >100%: Growing without new customers (excellent)
  • 90-100%: Stable customer base
  • <90%: Significant revenue leakage

Due Diligence Framework

A systematic approach to evaluating business opportunities before acquisition.

Financial Analysis

  • Review 12-24 months of revenue data (MRR breakdown)
  • Verify revenue through payment processor records
  • Analyze customer concentration (top 10 customers %)
  • Calculate and verify churn rates (logo and revenue)
  • Review expense breakdown and profit margins
  • Understand owner compensation and add-backs
  • Check for any outstanding liabilities or debts

Technical Assessment

  • Review codebase quality and documentation
  • Assess technical debt and maintenance burden
  • Evaluate infrastructure and hosting setup
  • Check security practices and vulnerabilities
  • Review third-party dependencies and APIs
  • Assess scalability of current architecture
  • Verify backup and disaster recovery processes

Customer & Market Analysis

  • Interview a sample of existing customers
  • Review customer feedback and support tickets
  • Analyze competitive landscape and positioning
  • Assess market size and growth potential
  • Understand customer acquisition channels
  • Review NPS scores and customer satisfaction

Operational Review

  • Document all business processes and workflows
  • Identify key person dependencies
  • Review contractor and employee agreements
  • Assess automation and efficiency levels
  • Review vendor contracts and relationships
  • Plan for knowledge transfer and transition

Valuation Methods

Common approaches to determining fair value for digital businesses.

Revenue Multiples

Valuation based on a multiple of annual recurring revenue (ARR).

Valuation = ARR x Multiple

Typical ranges:

  • Growing SaaS: 3-6x ARR
  • High-growth SaaS: 6-10x+ ARR
  • Declining/flat: 1-3x ARR

SDE Multiples

Seller's Discretionary Earnings - common for smaller businesses.

SDE = Net Income + Owner Salary + Add-backs

Typical ranges:

  • Content sites: 2-4x SDE
  • E-commerce: 2.5-4x SDE
  • SaaS: 3-5x SDE

EBITDA Multiples

Earnings Before Interest, Taxes, Depreciation, Amortization - for larger businesses.

Valuation = EBITDA x Multiple

Typical ranges:

  • Small businesses: 3-5x EBITDA
  • Mid-market: 5-8x EBITDA
  • Enterprise SaaS: 10x+ EBITDA
Factors Affecting Multiples

Increase multiples:

  • Strong growth rate (>20% YoY)
  • Low churn (<5% monthly)
  • High gross margins (>70%)
  • Diversified customer base
  • Strong competitive moat

Decrease multiples:

  • Declining or flat growth
  • High customer concentration
  • Technical debt/legacy code
  • Owner dependency
  • Competitive pressure

Red Flags to Watch

Warning signs that may indicate problems with a potential acquisition.

High Customer Concentration

If >20% of revenue comes from a single customer, or >50% from top 5 customers, you're exposed to significant risk if key accounts churn.

Declining Metrics

Consistently declining MRR, increasing churn, or shrinking customer base are serious concerns that need thorough investigation.

Platform Dependency

Heavy reliance on a single platform (Google, Facebook, Amazon) for traffic or functionality creates vulnerability to policy changes.

Technical Debt

Outdated technology, poor documentation, or security vulnerabilities can require significant post-acquisition investment to fix.

Owner Dependency

If the business relies heavily on the owner's skills, relationships, or daily involvement, transition risk is high.

Inconsistent Data

If financial records don't match, metrics seem inflated, or the seller is reluctant to provide verification, proceed with extreme caution.

Business Model Considerations

Different digital business types have unique evaluation criteria.

SaaS (B2B)

  • Longer sales cycles, higher contract values
  • Lower churn, stickier customers
  • May require sales team or account management
  • Higher valuations, typically 4-8x ARR

SaaS (B2C / SMB)

  • Higher volume, lower price points
  • Higher churn rates expected
  • Self-serve model, automated onboarding
  • Marketing-driven growth important

Marketplace

  • Network effects create defensibility
  • Balance supply and demand sides
  • Track take rate and GMV trends
  • Chicken-and-egg scaling challenges

Content / Media

  • Traffic source diversification critical
  • SEO volatility and algorithm risk
  • Ad revenue can be volatile
  • Lower multiples, typically 2-4x earnings

Put These Frameworks to Work

Understanding these concepts is the first step toward making informed investment decisions.

Back to Home About This Site