The Software Multiple

The thesis

A growing software company invests today to bill tomorrow, which is why current EBITDA understates what it is worth. Price is set on recurring revenue and on its quality: how much more existing customers spend each year, how much it costs to acquire a new customer, and how long that customer takes to pay back

Why EBITDA misleads

In a growing software company, much of current expense is investment in future customers: sales, marketing and product development. That expense depresses EBITDA for the period but generates recurring revenue for years to come. Valuing on current EBITDA penalises precisely the company that invests to grow

That is why the market shifts the multiple to revenue. Not as a fashion, but because, in high-quality recurring revenue, part of the future margin is already contracted

Recurring revenue, and its quality

Annual recurring revenue, the sum of subscriptions in force projected over twelve months, is the starting point. But two businesses with the same recurring revenue can command very different multiples, because what matters is the quality of that revenue

The most revealing metric is net revenue retention: how much the customer base of a year ago spends today, adding expansion and netting out cancellations and downgrades.¹ Above one hundred per cent, the company grows even without selling to a single new customer. Below it, the company must run to replace what it loses

The cost of acquiring a customer

Customer acquisition cost, compared with the revenue that customer generates, shows whether growth is healthy. The payback period, the time a customer's gross margin takes to cover the cost of acquiring it, is the indicator buyers look at first. A short payback signals growth that funds itself; a long one, growth that consumes cash

Gross margin completes the picture. Pure software typically carries a high gross margin. When it is low, there are usually embedded services, and services do not scale like software

The rule of forty

A convention widespread in the technology market adds the revenue growth rate to the profit margin.² If the sum exceeds forty per cent, the company balances growth and profitability well. One growing at sixty per cent with a negative margin of twenty is at the limit. One growing at ten per cent with a margin of ten falls below

The rule is not a valuation method, it is a filter. It serves to compare companies at different stages on a single scale

Not all recurring revenue is equal

A multi-year contract paid upfront is worth more than a monthly subscription, because it reduces churn risk and improves cash flow. Enterprise customers typically churn less than small businesses, which is why the same revenue is worth more when it comes from larger, longer contracts

The pricing model also counts. Per-seat revenue grows with the customer's hiring, and usage-based revenue grows with its activity. Each responds differently to the economic cycle, and the buyer prices that sensitivity

The adjustments the buyer makes

In due diligence, the buyer rebuilds the figures its own way. It checks whether capitalised development is inflating earnings, how deferred revenue is treated, how much of revenue depends on a few customers and how much of the business depends on the founder

Each of these points can reduce the multiple if it surfaces late. Identified in advance, they become a controlled argument. Discovered by the buyer, they become a discount

What this changes for the seller

Before going to market, a software company needs its metrics measured the way the buyer measures them: recurring revenue separated from non-recurring, retention by customer cohort, acquisition cost by channel and payback period

Companies that arrive with these figures organised and auditable are valued on the quality of their revenue. Those that do not end up valued on EBITDA, and lose the value they built by investing

Tiago H. dos Santos, partner in charge, Revenaz Assessoria, September 2026