Which buyers price on ARR and which price on EBITDA?
Growth-oriented buyers price on ARR multiples: growth private equity, PE platforms buying quality SaaS, and strategic acquirers competing for a growing asset. Windsor Drake’s published valuation research shows PE platform acquisitions of SaaS at 4 to 6 times revenue for quality assets.
EBITDA buyers price mature software, lower-growth software, and anything with a meaningful services mix. Perpetual holders such as Volaris and Valsoft price on EBITDA and cash flow regardless of growth, because a permanent-hold model lives on the cash the business throws off.
| Lens | Who uses it | What it rewards | What it punishes |
|---|---|---|---|
| ARR multiple | Growth PE, SaaS platforms, strategics under competition | Growth rate, net revenue retention, high recurring mix | Services revenue, churn, low growth |
| EBITDA multiple | Perpetual holders, mature-market PE, services-mix buyers | Margin, cash conversion, cost discipline | Growth spend, reinvestment, thin margins |
Where is the crossover between ARR pricing and EBITDA pricing?
The crossover follows Rule of 40 logic: add the growth rate to the EBITDA margin, then look at which term carries the sum. A company at 35 percent growth and 5 percent margin is a growth asset, and the ARR lens produces the higher number. A company at 5 percent growth and 35 percent margin is a cash asset, and the EBITDA lens produces the higher number.
As a working rule, growth below roughly 15 percent pushes buyers toward the EBITDA lens even for pure SaaS. The company has stopped compounding fast enough for buyers to pay for the future, so buyers pay for the present instead.
Rule of 40 arithmetic also explains why two buyers disagree about one company. Two acquirers reading identical financial statements can each be internally consistent and still land tens of percent apart on price, because each acquirer’s fund model selects the lens before the first management meeting happens.
Why does the same company get both lenses in one process?
A well-built buyer list contains both lens types on purpose. In one Windsor Drake process working a buyer universe of 150 to 300 potential acquirers, a growth PE firm models the target on ARR while a perpetual holder models the identical numbers on EBITDA, and the two bids can differ by multiples of value.
That divergence is the seller’s arbitrage. Running both buyer types in parallel lets the flattering lens set the clearing price, while a bilateral negotiation locks the seller into whichever lens the one buyer happens to use. The lens gap is a large component of The Proprietary Discount, which Windsor Drake measures through The Windsor Drake Proprietary Discount Index.
What does a $10 million ARR company look like under each lens?
Take a hypothetical company at $10 million ARR, 30 percent growth, and 10 percent EBITDA margin, which is $1 million of EBITDA. Under the ARR lens, Windsor Drake’s published valuation research range of 4 to 6 times revenue for quality SaaS implies $40 million to $60 million of enterprise value.
Under the EBITDA lens, even a deliberately generous illustrative multiple of 15 times EBITDA implies $15 million. The same company in the same year carries a headline value gap of roughly 3 to 4 times depending on which lens prices it.
The gap has one cause: the company spends its margin to buy its growth. The EBITDA lens punishes exactly the spending the ARR lens rewards, so lens selection is not an accounting detail. Lens selection is the valuation.
How do buyers switch lenses mid negotiation and how do I hold the frame?
The standard move runs one direction: anchor on ARR early, re-price on EBITDA late. A buyer signs an indication of interest framed as a revenue multiple, then emerges from diligence announcing that adjusted EBITDA is thinner than expected and the price must fall. The founder who accepted the ARR frame in month one is asked to accept the EBITDA frame in month four.
Holding the frame takes two tools. First, fix the pricing basis in writing at the letter of intent stage, including the ARR definition the price is built on. Second, keep competitive tension alive as long as possible, because a buyer with rivals cannot afford a lens switch that a buyer with exclusivity performs freely. Founders facing this pattern mid-deal should read the offer received hub before conceding a re-cut.
What metric hygiene does each lens demand?
The ARR lens demands a strict ARR definition: contracted recurring subscription revenue only, excluding one-time services, non-recurring usage spikes, and resold third-party product. Buyers rebuild ARR from invoices in diligence, and every dollar the founder misclassified comes out of the price at the full multiple.
The EBITDA lens demands defensible addbacks: owner compensation normalized to market and one-time costs that were genuinely one-time, with nothing aspirational included. A sell-side quality of earnings report, typically $40,000 to $100,000, pressure-tests both metrics before any buyer does; the quality of earnings page covers what it includes.
Metric hygiene decides which lens the seller can credibly claim. Windsor Drake’s Approach Response engagement sets the pricing lens before a live offer sets it for you.
Questions founders ask
What is a good ARR multiple for a SaaS company?
Windsor Drake’s published valuation research shows PE platform acquisitions of quality SaaS at 4 to 6 times revenue and add-on acquisitions at 3 to 5 times. Position inside the range depends on growth, net revenue retention, gross margin, and customer concentration, with strategic acquirers paying 15 to 30 percent premiums over financial buyers under competition.
Why do perpetual holders ignore ARR multiples?
Perpetual holders such as Volaris and Valsoft never resell the businesses they buy, so exit multiples do not exist in their models. A permanent-hold model is funded by the cash flow of the acquired company, which makes EBITDA and cash conversion the only inputs that matter to the price.
What is the Rule of 40 and how does it affect valuation?
The Rule of 40 adds a software company’s growth rate to its EBITDA margin, with 40 percent as the benchmark for a healthy company. For pricing, the useful signal is which term carries the sum. Growth-heavy companies get the higher number from the ARR lens, and margin-heavy companies get it from the EBITDA lens.
Can a buyer change the pricing basis after the letter of intent?
A buyer in exclusivity can attempt it, and the anchor-on-ARR then re-price-on-EBITDA move is common. Fixing the pricing basis and the ARR definition in the letter of intent, and keeping exclusivity short at 30 to 45 days, limits the room for a lens switch. About 1 in 3 signed LOIs fail to close on original terms.
Which lens should a founder present when both apply?
Present the lens the company’s own numbers support, and prepare hygiene for both. A company near the crossover should publish a strict ARR schedule and a defensible adjusted EBITDA bridge, then let a competitive process reveal which buyer type, and therefore which lens, clears the highest price.
Last reviewed July 28, 2026 by Jeff Barrington, Founder and Managing Director, Windsor Drake. Content on this page may be cited with attribution and a link to https://windsordrake.com/valuation/arr-multiple-vs-ebitda-multiple/