ARR vs EBITDA vs SDE (Which Metrics Matter for SaaS Valuation?)
Understand when ARR matters most, when EBITDA or SDE becomes relevant, and how buyers triangulate SaaS value using all three.
Trust & methodology
Author: Amanda White
Last updated: 2026-01-14
Last reviewed: 2026-01-14
Methodology: Benchmarks are cross-checked across market reports, transaction comps, and founder-level operating data.
Disclosure: This content is general information, not financial advice.
On this page
- What you'll learn
- Why it matters
- The metric or formula
- Benchmarks & ranges
- Common mistakes
- How to improve it
- Examples
- Checklist
- Key takeaways
- FAQs
- Summary
- Sources & further reading
- Internal links
- Next steps
- Related resources
- Run the calculator
Jump to the section you need, or keep scrolling for the full playbook.
What you'll learn
You will learn how ARR, EBITDA, and SDE each fit into a SaaS valuation model and why buyers lean on different metrics depending on size and deal type.
We will map where each metric appears in a typical diligence request list, so you know how to prepare the right schedules before the buyer asks.
You will see how to present all three without confusing the narrative, including how to normalize owner compensation, one-time expenses, and non-core revenue.
You will leave with a framework for explaining which metric you want the buyer to anchor on and how to defend it with data.
Quick definition (TL;DR)
SaaS valuation deep diveARR measures recurring revenue annualized at today’s run rate. EBITDA measures operating profit before interest, taxes, depreciation, and amortization. SDE (seller’s discretionary earnings) adds owner compensation and discretionary expenses back to EBITDA to reflect owner benefit.
In SaaS valuation, ARR is the default anchor for growth-stage companies, while EBITDA and SDE become more important as cash flow and owner benefit increase.
The key is to show how the three metrics reconcile. Buyers trust a story that ties revenue growth to profitability over time.
When SDE is used, document which expenses are truly discretionary and which are structural. That transparency prevents buyers from haircutting your adjustments.
Why it matters
Different buyers use different anchors. Financial buyers often focus on EBITDA or SDE, while growth investors still prioritize ARR quality.
If you do not reconcile the metrics, buyers will apply their own adjustments, often leading to lower valuation ranges.
Explaining the bridge between ARR and cash flow helps you control the narrative in diligence.
Knowing the metrics lets you forecast how a buyer might structure earn-outs or working capital adjustments.
Understanding these metrics improves your ability to structure earn-outs and seller financing intelligently.
The metric or formula
ARR is calculated by taking current subscription revenue and annualizing it. EBITDA is operating profit before non-cash and financing items. SDE = EBITDA + owner salary + discretionary expenses.
SaaS buyers typically start with ARR × multiple, then sanity-check the outcome against EBITDA or SDE to ensure the valuation is realistic for cash generation.
If EBITDA is negative, expect a heavier focus on unit economics and the timeline to breakeven, because buyers want evidence that the ARR multiple has a path to real cash flow.
A simple bridge that links ARR to gross margin, operating expenses, and cash flow keeps the discussion grounded and prevents confusion between growth investment and structural inefficiency.
Benchmarks & ranges
Growth-stage SaaS is usually priced off ARR, with EBITDA used as a secondary lens to validate sustainability.
Private equity buyers may shift the anchor to EBITDA once a company reaches consistent profitability and scale.
SDE is most common in smaller founder-led SaaS deals where owner salary and discretionary spend materially affect earnings.
If ARR is growing quickly but EBITDA is negative, expect buyers to demand a credible path to breakeven.
When ARR growth slows, buyers lean more on EBITDA and SDE to understand owner benefit.
Common mistakes
Treating SDE as a substitute for ARR rather than a cash flow lens for owner benefit.
Adding back recurring expenses to inflate EBITDA without explaining operational impact.
Mixing one-time implementation revenue into ARR, which overstates recurring value.
Ignoring how deferred revenue and cash collections affect EBITDA quality.
Overlooking how sales comp timing can make EBITDA look better or worse in a single quarter.
Use the free SaaS valuation calculator
Calculator CTATranslate ARR, EBITDA, and SDE into a valuation range by testing different assumptions in the free calculator. It helps you see how each metric shifts the outcome.
Use the free SaaS valuation calculatorHow to improve it
Provide a clear ARR bridge that separates recurring subscription revenue from services and one-time fees.
Normalize EBITDA by documenting true one-time expenses and owner-related adjustments.
Show how investments in product and marketing translate into retention or growth so EBITDA losses are explainable.
Create a buyer-ready SDE schedule that clarifies owner compensation and discretionary spend.
Add a simple cash flow bridge so buyers see how ARR converts to cash over time.
Use cohort retention and gross margin to show why ARR deserves the valuation anchor.
Examples
Proof points you can reuse
Founder-led SaaS with $900k ARR
A solo founder reports $180k EBITDA, but the company pays the owner $140k and covers $30k in discretionary travel. SDE becomes $350k.
A buyer values the deal at 3x ARR ($2.7M) and cross-checks with 7x SDE ($2.45M). The final range lands around $2.4M–$2.8M because the metrics reconcile and the buyer trusts the adjustments.
Scaling SaaS at $6M ARR
The company grows 45% YoY with 112% NRR and posts -$400k EBITDA due to heavy product hiring. A buyer anchors at 6.5x ARR ($39M) but asks for a path to 10% EBITDA.
After showing a 12-month plan to improve margins and reduce support costs, the buyer keeps the ARR multiple intact and uses EBITDA as a forward-looking sanity check.
Profitable SaaS at $12M ARR
A vertical SaaS platform grows 22% YoY with 106% NRR and runs $2.4M EBITDA. A private equity buyer values the business at 5.5x ARR ($66M) and checks that the multiple implies about 27x EBITDA.
After validating low churn and stable margins, the buyer stays near the ARR-based price because the cash flow supports the range.
Checklist (copy/paste)
Publish a clean ARR schedule with definitions for upgrades, downgrades, and churn.
Build a normalized EBITDA bridge that highlights true one-time items.
Prepare an SDE schedule if the business is owner-operated.
Explain how current losses translate into growth or retention gains.
Align the valuation anchor you want the buyer to use and justify it with data.
Show the timeline for margin expansion if EBITDA is negative today.
Document cash flow seasonality so buyers understand working capital shifts.
Key takeaways
ARR is the default valuation anchor for growth-stage SaaS.
EBITDA becomes more important as cash flow stabilizes and scale increases.
SDE is useful for smaller founder-led deals where owner benefit matters.
Buyers triangulate metrics, so reconcile them before they do it for you.
Clear definitions and normalization protect your valuation range.
A clean bridge between ARR and cash flow builds buyer trust.
FAQs
Which metric should I highlight in my deck?
Start with ARR and net retention, then include EBITDA or SDE as a credibility check. Show the bridge between them so buyers do not make their own assumptions.
Can EBITDA replace ARR for SaaS valuation?
It can for later-stage or cash-flow-heavy SaaS, but most buyers still want ARR context to understand growth and revenue quality.
How do buyers treat negative EBITDA?
They look for a believable path to breakeven and want to understand which expenses are investment versus inefficiency.
Is SDE only for very small SaaS businesses?
It is most common under a few million in ARR, but it can still be useful to explain owner benefit in any founder-led company.
What happens if ARR and EBITDA point to different valuations?
Buyers usually negotiate toward the lower end unless you can prove why the ARR multiple is justified by durable growth.
Should I add back all discretionary spend?
Only if the spending is truly optional and non-recurring. Be transparent so buyers trust your adjustments.
How should I present owner compensation in SDE?
Show the current owner compensation, then list the normalized replacement salary a buyer would need. The difference is what buyers typically add back.
Summary
ARR, EBITDA, and SDE each reveal a different lens on value. ARR explains recurring revenue quality, EBITDA shows operating efficiency, and SDE highlights owner benefit for smaller deals.
The strongest valuation narratives show all three and explain why ARR should be the anchor. When you reconcile the metrics proactively, you keep control of the multiple discussion.
Use one primary anchor, then show the supporting metrics as proof. That framing keeps the conversation grounded in value rather than debate over accounting adjustments.
When you can walk a buyer from ARR to cash flow without gaps, you build confidence and keep the deal moving. It also reduces renegotiation risk because the assumptions are visible early. Bring the same reconciliation to every buyer call to keep the narrative consistent, and align advisors on the same bridge. This keeps negotiations efficient.
Sources & further reading
Continue exploring
Next steps to act on this guide
RecommendedTranslate the insights into a valuation narrative by running the calculator, then use the tools and category playbooks to tighten your metrics before you talk to buyers or investors.
Valuation updates
Get new benchmarks and exit playbooks
Subscribe for valuation updates, deal prep checklists, and new calculators. No spam, just actionable insights.
By subscribing, you agree to our Privacy Policy.
Use the free SaaS valuation calculator
Updated 2026-01-14Plug your ARR, growth, retention, and margin into the calculator to see how these playbooks translate into value. No login required.