John Warrillow is the creator of The Value Builder System and author of Built to Sell: Creating a Business That Can Thrive Without You as well as The Automatic Customer: Creating a Subscription Business in Any Industry. In a recent interview for his latest book, John interviewed Zane Tarence, managing director of Founders’ Software and Internet Practice, to discuss subscription-based business models and the current market valuations for these types of companies. Zane indicated that he sees valuations fall into one of three buckets, which are primarily based on annual recurring revenue and growth rate:
24-48 x MRR (2-4 times ARR)
These are typically very small software companies with less than $5 million in recurring annual revenue. Companies in this first bucket are usually growing modestly, with subscription cancellation rates (i.e., “churn”) in the area of 2-4% per month.
48-72 x MRR (4-6 times ARR)
These are larger software companies with recurring revenue of at least $5 million annually, which they are growing at the rate of 25-50% per year. Their net churn is typically below 1.5% per month.
72-96 x MRR (6-8 times ARR)
These are the rare, fast-growth software companies that are growing more than 50% per year, with at least $5 million in annual revenue and net churn below 1% per month. These companies usually offer a solution (typically an industry-specific one) that their customers need to use to get their jobs done.
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