SDE vs ARR Multiples: Which One Values Your SaaS?

Every SaaS valuation multiplies something. The first question is what: profit, usually measured as seller's discretionary earnings (SDE), or annual recurring revenue (ARR). Pick the wrong base and the number you have in your head can be off by a wide margin from what a buyer will offer.

When buyers use SDE

Small, profitable, owner-run SaaS businesses are usually priced on SDE. The buyer is often an individual or small firm that will run the business, so they care most about the cash it produces. FE International's August 2026 benchmarks quote SaaS under $1M ARR at roughly 2.5x to 4x SDE, and Acquire.com reports a median of 3.9x profit for SaaS sold on its marketplace in 2024 and 2025 (sources in how much is my SaaS worth).

When buyers use ARR

Larger and faster-growing companies are more often priced on ARR, because the buyer is paying for growth that profit today does not yet show. FE International quotes about 3.5x to 5.5x ARR for companies with $5M to $10M ARR, and 5x to 7x above $20M (FE International).

Between those sizes, buyers may look at both. A slow-growing business with strong margins tends to be priced on profit; a fast-growing one running near break-even tends to be priced on revenue.

How to calculate SDE

SDE starts with net profit before tax and adds back what a new owner would not have to pay:

• One owner's salary and benefits, because the buyer replaces you.
• Non-cash expenses such as depreciation and amortization.
• Interest on debt the buyer will not take on.
• Genuinely one-time costs, such as a legal matter that is closed or a one-off migration.
• Personal expenses run through the business.

The rule buyers apply to add-backs is strict: if a cost recurs every year, it is not one-time. Document each add-back with what it was, why it will not recur, and where the figure comes from. An add-back a buyer cannot verify is usually removed in diligence, and the price falls with it.

A worked comparison

Take a business with $600,000 ARR and $180,000 SDE. At 3x SDE, the profit basis gives $540,000. At 2x ARR, the revenue basis gives $1,200,000. These multiples are illustrative only; the point is that the two bases can be far apart, and a buyer will choose the one that fits the business, not the one that gives the bigger number.

Run both bases at once

The free SaaS valuation calculator computes a revenue-based and a profit-based figure from your numbers, uses the higher as the midpoint, and shows a range 25% either side. Enter your SDE for the profit basis. It is an estimate from general market rules of thumb, not an appraisal or an offer.

For the metrics that move either multiple, see what makes a SaaS business sellable. When you are ready, see how selling with SaaSClose works.