The arithmetic, in full
Almost every serious valuation of a small software business is the same two-step calculation. Step one: work out what the business earns its owner in a year. Step two: multiply that by a number that reflects how safe those earnings look to somebody who did not build it.
Owner earnings, at this size, are close to gross profit less a modest operating allowance. We take revenue, subtract hosting, third-party APIs and payment fees to get gross margin, then subtract a further 15% of revenue as the running cost a new owner inherits. On $10,000 MRR at 85% gross margin, that is $84,000 a year.
The multiple comes from published data on businesses of the same size. Flippa, 20 Feb 2026 puts owner-operated software under $1M ARR at roughly 2x–4x owner earnings; FE International, 21 Jan 2026 puts businesses under $2M nearer 5x–7x. We sit inside the lower range and rise with size, because the buyer pool widens as the number gets bigger.
| Size band | Base multiple, owner earnings | Roughly, on revenue |
|---|---|---|
| $1,000–$5,000 MRR | 2.4x | 1.7x |
| $5,000–$10,000 MRR | 2.8x | 2.0x |
| $10,000–$25,000 MRR | 3.2x | 2.3x |
| $25,000–$50,000 MRR | 3.6x | 2.6x |
| Above $50,000 MRR | 3.6x | 2.6x |
Comps updated 24 Aug 2026. The revenue column is illustrative at 85% gross margin — the multiple we actually apply is on earnings, not on revenue.
Then five adjustments, each one costed
The base multiple prices an average business in your band. You are not average, and the difference is where most of the money is. We apply five adjustments and show every one of them with its source:
- 01Monthly revenue churn, against a 3.2% reference for this size. Each percentage point moves valuation about 20% — Livmo, 26 Feb 2026 reports 15–25% and we use the midpoint.
- 02Growth, in tiers that follow SaaS Capital, Jan 2025: under 20% a year, 20–40%, 40–70%, above 70%.
- 03Gross margin, with above-80% earning a premium — damped, because the published gap is measured on far larger companies.
- 04Operating history, where two years is the buyer's preferred entry point and three years and up starts to earn a premium.
- 05Customer concentration, which is a ValuePulse model rule rather than a published figure, and is labelled as one.
Why the free calculators give you a different number
Most free valuation widgets ask for revenue and growth, multiply by a fixed number, and stop. That is not a valuation, it is a lookup. It cannot tell you that your largest customer is the reason your number is low, because it never asked, and it cannot show you a comparable deal, because it does not hold any.
What to do with the number
Treat the range as a starting position, not a price. If you are twelve months from selling, the useful output is not the figure — it is the ranked list of what is holding it down, because most of those are fixable in a quarter. If a buyer has already made an offer, compare their number against the range and ask which of the five adjustments they are pricing.