SaaS valuations have reset – the rules are changing

The UK SaaS market has continued to grow steadily, supported by digital adoption and a supportive regulatory environment. London remains a key European investment centre, attracting domestic and overseas interest.

While growth has continued, valuation expectations have shifted materially. Public market valuations have reset following the Covid era peak. Based on a broad global SaaS Index, revenue multiples peaked at approximately 14 to 18 times in 2021, driven by fundamental changes in remote working practices and accelerated investor appetite. A sharp decline followed in 2023 as work and social structures normalised and investors reacted to rising interest rates.

Across 2023 to 2025, median multiples stabilised around six times revenue, reaching approximately five times by the fourth quarter of 2025. By December 2025, the referenced index was down 16 per cent, with a sharp further drop off in early 2026 signalling more cautious sentiment, with the rise of AI signalled as a potential threat to many SaaS business models. Investors are now focused on profitability, quality of earnings and cash burn.

The impact of frontier AI models on SaaS

Recent developments in artificial intelligence have further influenced valuation dynamics. The release of Claude 4.6 has raised investor concern that advanced agent models could replace parts of the traditional SaaS stack. Opus 4.6 can work across long documents, plan multistep tasks and run workflows without human supervision. This capability accelerates a shift already reflected in public company multiples.

Market reaction, including software sector sell offs and increased scrutiny of AI exposed categories, reflects growing concern around defensibility. SaaS propositions built on task automation or limited proprietary data are seen as more exposed. For valuation work, this means revenue quality is now judged with a sharper focus.

Buyers are favouring businesses with embedded roles in client processes, regulatory dependencies or proprietary datasets. These characteristics create resilience even as AI capabilities improve. Exit multiples are widening between differentiated and undifferentiated businesses. Companies without distinctiveness may see heavier discounting, while those with clear integration, compliance relevance or valuable data assets remain well positioned. Forward assumptions will need modest adjustment, particularly around growth and pricing strength, but the core SaaS model remains investable where differentiation is real.

What drives SaaS valuations

Valuation multiples continue to correlate strongly with expectations of future revenue growth. Analysis of a mid cap subset of SaaS businesses valued between £200 million and £400 million shows a strong relationship between forward three year CAGR and EV to revenue multiples, with an R squared of 0.77. A listed mid cap business forecasting zero per cent growth would typically trade at around two to three times revenue, while forecast growth of 25 per cent suggests multiples of ten to fifteen times.

Recurring revenue quality materially influences valuation. Net revenue retention above 100 per cent indicates that upsell outweighs churn. A fourth quarter 2024 study showed that companies with net revenue retention above 120 per cent achieved median exit multiples almost ten times higher during the period than those with retention below 90 per cent.

Profitability has improved following extensive cost reduction and scale efficiencies. Median EBITDA and net income margins were near decade highs by the third quarter of 2025. Efficiency metrics are now central to valuation discussions, although further margin gains for many businesses will rely on revenue growth rather than additional cost control.

Around 40 per cent of European SaaS companies were profitable in 2024. Buyers now favour sustainable growth supported by a clear path to profitability. Companies with high cash burn and no visible profit horizon face heavily discounted valuations unless they possess distinctive intellectual property or a clearly visible scale opportunity.

Scale remains a key driver of value. Smaller companies have consistently traded at material discounts to the broader SaaS index. Over the past three years, businesses in the tenth percentile and lower quartile of market capitalisation traded at discounts of approximately 80 per cent and 60 per cent respectively to median index multiples.

Market benchmarks and subsector perspectives

Average public EV to revenue multiples declined from around six times in 2024 to approximately five times by the fourth quarter of 2025, with further downside being seen in early 2026. UK and European mid market private M and A revenue multiples have typically ranged from around four to eight times, with outliers on both sides. Strategic acquirers have paid approximately 1.5 to two times higher multiples than financial buyers, and a modest US premium persists. Top quartile Rule of 40 performers achieved nearly three times the EV to revenue multiples of bottom quartile companies.

Subsector dynamics vary. Fintech revenue is projected at approximately £35 billion in 2026 and forecast to reach around £62 billion by 2030. Cybersecurity revenue was around £1.4 billion in 2025, with forecast growth to approximately £2.0 billion by 2030, supported by rising cybercrime, increasing costs per incident and higher regulatory fines. The UK GovTech market is estimated at around £20 billion in 2025, driven by renewal of large public systems, SME procurement and long term digital public service initiatives.

LegalTech adoption is high, with 96 per cent of UK firms using AI tools and over 10 per cent of chargeable hours capable of automation in the near term. HealthTech growth reflects NHS digital transformation and the shift towards remote monitoring, with one in three GP appointments in England conducted remotely by August 2025. The UK AI market was valued at approximately £72 billion in 2024, with strong adoption across finance, healthcare and professional services. AI driven software both supports and challenges established SaaS models.

What this means for valuation work

Valuation in SaaS requires clear judgement on growth credibility, recurring revenue strength, operating efficiency and defensibility. The reset in public and private markets underscores the importance of fundamentals. Revenue multiples have reset since the Covid era peak but remain high compared to many sectors due to the scale up potential of effective platforms.

Closer examination of value drivers is critical for independent valuations to reflect investor perceptions and actual pricing sentiment. FRP’s independent, sector informed approach brings clarity to investors, boards, lenders and legal advisers involved in transactions, disputes and financial reporting across the SaaS landscape.

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