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20 Factors to Track When Valuing Your Software Business (by SEG)

By April 19, 2024Article

For more than two decades, Software Equity Group has honed a proprietary methodology to evaluate software companies and assess their readiness to exit.

By considering critical aspects of the software industry, such as market demand, competitive positioning, financial performance, and more, we have not only achieved a leading first-pass success rate but consistently secured and often surpassed the valuation multiples our clients aspire to, guiding software operators to successful exits and garnering industry accolades along the way.

Sandhill Group has summerize the 20 Factors to Track When Valuing a Software Business; however the full report from SEG examines the quantitative and qualitative measure measurements that were used.

Those details can be reviewed, here.


A GRR acts as a reliable compass pointing toward revenue stability. A high GRR often signals a robust level of customer satisfaction and loyalty. Customers continue to find value in the product or service, leading to sustained revenues. Conversely, a low GRR could flag potential satisfaction, product fit, or service delivery issues.


The ARR growth rate highlights your business’s growth trajectory and future potential. It not only assures buyers and investors of the prevailing market demand, strong productmarket fit, and unique product differentiation but also attests to your capability to capitalize on that demand. While a significant growth spike in a single year is promising, consistent growth over several years, as indicated by the Compound Annual Growth Rate (CAGR), is more telling.


EBITDA margin is a key financial metric that provides insights into the efficiency of the company’s operations and the amount of cash flow generated by core activities. By stripping away factors that can vary greatly between companies, such as interest payments, tax strategies, and amortization, it reveals the underlying profitability of business operations and allows for apples-to-apples comparisons with other SaaS companies.

4) RULE OF 40

For SaaS businesses, balancing growth and profitability can be challenging. Rapid growth often leads to higher costs, while a sole focus on profitability might stifle expansion. The Rule of 40 provides a holistic view, helping companies determine if their growth strategies are sustainable.


Gross margins highlight the profitability efficiency of software companies, which often have high multiples due to their robust profit margins. A solid gross margin indicates more profits available for business reinvestment, making it a crucial measure of a company’s financial health and long-term profitability.


LTV:CAC is an important unit economic metric, encompassing several levers within the business, which speaks to the efficiency of the business model. By dissecting this formula, one can derive insights into essential components like ARR, Gross Retention, sales and marketing efficiency, and ROI. This metric indicates how efficiently a company’s customer acquisition strategy affects its profitability. Ideally, the revenue a customer brings should exceed the cost to acquire them. A high ratio means the business is seeing a good return on its sales and marketing investments.


Too much revenue from one customer can be perceived as a risk to potential buyers or investors. If that customer leaves, it could disproportionately impact the company’s revenues and profitability.


ARR indicates the yearly recurring revenue a company expects, making it a key signal of its overall health and growth potential. Buyers and investors pay close attention to this metric, especially for software companies in the lower-middle market segment.


NRR offers a glimpse into customer satisfaction, how well the product fits the market, and the company’s skill in boosting ARR from current customers. A high NRR suggests growing revenue from the existing customer base, indicating strong loyalty, effective upsell strategies, and a product that consistently meets user needs.


Revenue Growth offers an encompassing perspective on a company’s fiscal health, extending beyond the insights provided by ARR growth, which we’ve recognized as a significant metric with our “High” weightage. This insight lets us discern exactly what is propelling the company’s growth. For buyers and investors, growth primarily driven by ARR is often more attractive for the reasons we stated previously.


Logo retention provides insight into a company’s customer satisfaction levels, the effectiveness of its customer retention strategies, and the overall stickiness of its products and services. A high rate suggests that a company has a durable customer base and demonstrates that customers find value in the company’s offerings. It also implies that your company’s customer relationship management efforts are effective and capable of building long-lasting ties.

As such, this reflects positively on your brand reputation and market position, which can, in turn, help attract new customers, enhance market share, and positively impact the company’s enterprise value.


The delivery model is the core of the business, shaping how customers interact with products and services, how updates are deployed, and how costs are structured. It dictates user experience, rollout strategies for updates, cost dynamics, and, crucially, the scalability of the software’s architecture.


The pricing model is vital because it directly impacts revenue visibility, which is the ability to predict and anticipate future revenue streams. A clear understanding of future revenue is essential for planning, scaling operations, and making informed business decisions. Stable and predictable revenue is particularly attractive to stakeholders as it minimizes uncertainty and risk.


Product differentiation is the key to highly valued software businesses. Differentiated products usually lead to strong customer retention, significant growth, and increased customer loyalty. In contrast, commoditized products struggle to compete and face higher churn rates. Product differentiation can be achieved through usability, product depth and breadth, vertically focused or purpose-built solutions, and so on. Differentiated products aren’t easily duplicated overnight, which is important to buyers and investors.


Market attractiveness is crucial as it delineates the opportunities and limitations of a company and its offerings. In expansive, growing, and less congested markets, a company’s value is particularly enhanced when it occupies a unique position. Market attractiveness is shaped by elements such as growth potential, long-term profitability, product relevancy, and the ability to adapt to changing consumer behaviors.

Recognizing these factors informs potential buyers about a company’s growth trajectory and responsiveness to market shifts.


The technology behind a software product directly influences the product’s performance and user experience. A welldesigned and efficient tech stack demonstrates a company’s ability to scale its operations seamlessly and accommodate a growing customer base without compromising performance.


The management team is pivotal in guiding a software company’s trajectory and success. Buyers and investors prioritize leadership with a track record of executing business plans and possessing a forward-thinking vision. Beyond product and financials, the team’s past successes suggest future potential, elevating valuation. With stable leadership, succession planning, and a positive culture, the company’s value in the eyes of stakeholders rises. While these qualities are beneficial, they aren’t all mandatory for a company to be seen as valuable.


Expanding markets hint at increased adoption, making it potentially easier for businesses to make sales. Even in situations where the market might not be expanding significantly, there can still be robust growth opportunities. If the Total Addressable Market (which we will discuss next) is sizable and a company’s solution offers substantial value, it can thrive. This is often the case with many of our clients who are displacing legacy technology or automating manual processes.

Their strong value propositions provide solid growth prospects despite rapid market growth. Awareness of market growth rates facilitates goal setting for companies and enlightens potential buyers and investors about the prospective sales momentum.


A substantial TAM indicates vast growth and profit potential, but it’s crucial that the company can effectively tap into revenue from this market. Conversely, a smaller TAM might suggest a niche, potentially limiting long-term growth. For SaaS companies that have chosen not to raise a substantial amount of money through venture capital, it’s essential for a company’s TAM to be expansive enough for growth yet not so vast that it becomes a magnet for intense competition, which could hamper its ability to maintain or even capture market share. The ideal TAM is a balance: large enough for substantial growth potential while maintaining your strong differentiation but not so immense that it becomes a
competitive battleground.


By examining the direction of KPIs, potential acquirers can ascertain whether the business is progressing favorably or veering off course. While the current metric might not represent an ideal picture, a positive trend signifies potential. An upward trend can be leveraged to paint a compelling narrative of a promising future, which is particularly vital for attracting buyers and investors. Even if today’s numbers aren’t optimal, a trajectory pointing in the right direction can bolster confidence, enabling stakeholders to envision and advocate for the business’s longterm potential. Similarly, from a market standpoint, if the market is undergoing a significant inflection point and driving demand for new innovative solutions, a company offering such solutions can have a positive impact on value.

To view SEG’s full report in detail, click here:

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