SaaS Valuations with Recurring & Non-Recurring Revenue
Most SaaS businesses have some form of non-recurring revenue (such as from implementation) that represents an important part of the business.
But since the largely recurring nature of subscription revenue is the reason SaaS companies attract high valuation multiples, what influence does non-recurring revenue have on those valuations?
At Vista Point, we tend to group SaaS companies into two buckets where:
- Non-recurring revenue <20% of total revenue
- Non-recurring revenue >20% of total revenue
In scenarios where non-recurring revenue is less than 20%, we tend to expect buyers to just apply the same revenue or ARR multiple to the entire revenue base.
But in scenarios where non-recurring revenue is greater than 20%, you start to enter a range where buyers would conduct a “sum of the parts” valuation. In this case, the recurring portion of revenue would be valued at a high multiple (7-15x), while the non-recurring portion would only be valued at 1-3x. This approach, of course, reduces your overall valuation.
In addition, having non-recurring revenue >20% also puts you into the danger zone of being perceived as something other than pure SaaS—venturing more into the tech-enabled services space where valuation multiples aren’t as attractive.
Having some non-recurring revenue isn’t catastrophic, but the main insight is that founders should take care not to let the services side of their business get out of control. You’re much better off spending time streamlining implementation or making the software more intuitive so you can minimize the services piece of the business and focus on recurring subscription revenue.