What is a valuation multiple?
A business is ultimately worth the future cash flow it can generate, discounted back to what that cash is worth today. A valuation multiple(whether it is based on revenue, EBITDA, or earnings) is simply a shorthand method to approximate this complex calculation.
The "multiple" itself is heavily influenced by the risk and uncertainty surrounding those future cash flows. Every business has risks, which are ultimately risks that the future cash flow is lower than expected. Higher perceived risk leads to a lower valuation multiple.
Consider how risk affects valuation in the context of government bonds. The U.S. government can borrow money at a very low interest rate (e.g., ~5%) because the perceived risk of default is extremely low. In contrast, a country with a more volatile economy, like Argentina, might have to pay a much higher interest rate (e.g., ~15%). The difference in the interest rate is a measure of perceived risk. The same principle of risk applies to valuing companies.
Why are multiples on EBITDA?
Many founders are familiar with Seller Discretionary Earnings (SDE), which adds the owner's salary back to profits. As buyers, we often start with SDE, but then "normalize" this figure to EBITDA by subtracting a market-rate salary for the work that the founder does. This helps us understand the business's standalone cash flow.
We value businesses based on their earnings—specifically, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). EBITDA is a proxy for the cash-generating capacity of a business before any investments into growth, or payment of taxes. While many tech investors use revenue multiples—because their investments are unprofitable—revenue multiples are still, at least indirectly, incorporating assumptions around the expected profitability of the business.
Consider this example of two apps that, except for revenue size and margins, are equal:
● App A: $5 million in revenue with a 10% EBITDA margin. EBITDA = $500,000.
● App B: $3 million in revenue with a 50% EBITDA margin. EBITDA = $1,500,000.
A 3x revenue multiple would value App A at $15 million and App B at $9 million, despite App B generating 3x more EBITDA. This is why we focus on EBITDA, since this is a more accurate measure of economic reality for an established and profitable businesses with known margins.
What determines multiples?
The most significant source of valuation misalignment stems from comparisons to public B2B SaaS companies. While both mobile apps and B2B SaaS use a subscription model, the underlying business quality, risk profile, and growth dynamics are different. Those differences changes their risk profile and, therefore, their valuation multiple.
Multiples are a function of risk, so the primary question for any buyer is: what factors determine that risk? For consumer apps, several main factors influence the multiple that acquirers will pay:
Revenue Size
The “effective multiple” after accounting for the overhead of the founder is a key consideration. When an acquirer buys a business, they must ensure it can operate without the founder, or often must replace the founder if they transition out of ongoing operations.
The owner's salary (part of SDE) is replaced by salaries of new hires, even if the managers were allocated from the existing team of the acquirer. This directly reduces the buyer's net cash flow. These costs have a disproportionate impact on the actual profitability of smaller businesses after an acquisition, which inflates the effective multiple the buyer pays.
Consider a hypothetical example:
Even when paying a lower nominal multiple for the smaller app, the effective multiple paid by the buyer is the same, because the overhead costs (which are implicit for sellers who are owner operators) are explicit for the buyer. These costs have a disproportionate impact on smaller apps.
“Key Man Risk”
An indirect cost of replacing the founder is the risk of doing so. Many smaller app businesses are heavily dependent on the founder's daily involvement, creating significant "key-person risk." If the expertise required to operate the business is tied to a single person or even small team, then the business is less transferable. Buyers must discount the valuation to account for the risk and cost associated with building new systems and transferring operational knowledge.
This is why many buyers, particularly strategic acquirers less familiar with the app space, require founders to remain with the business for several years post-sale. In those structures, a large part of the purchase price is often tied to an earnout contingent on the founder's continued, active management. Because of our experience in operating apps, we are much more flexible in terms of the ongoing role of owners after the sale of their apps.
Subscriber Retention
The single most important metric for determining the durability of a consumer subscription app is its annual retention rate of paying subscribers. This is where the crucial difference with enterprise SaaS lies. Enterprise software companies often achieve Net Revenue Retention (NRR) rates above 100%, meaning they grow revenue from existing customers alone through up-selling and seat expansion. Mission-critical B2B software also has higher switching costs. The result is that median NRR for public B2B SaaS companies is 112%, and even the bottom quartile achieves 87% (based on 2024 data).
This stands in stark contrast to consumer apps, which operate on Gross Retention that cannot exceed 100% and have no embedded expansion revenue. For consumer apps, churn is inherently higher, and switching costs are lower. A B2B SaaS company with >100% NRR is fundamentally more durable than apps that must constantly replace churned subscribers.
Growth Trajectory
A common assumption is that high growth rates will continue indefinitely. In reality, consumer apps almost always experience a deceleration in growth as they scale. The basic formula for this is: Growth = (New Subscribers / Starting Subscribers) – (Churn). As the subscriber base increases, the growth rate inevitably slows unless the number of new subscribers is accelerating.
With stable new subscribers each year, growth slows. The table below shows a hypothetical app that retains 60% of its subscribers annually and adds a constant 5,000 new subscribers each year:
Notice how the growth rate naturally declines as the base gets larger. To maintain high growth rates, a business must continuously accelerate the acquisition of new subscribers, which is often the primary bottleneck. As partners, we focus on breaking through this plateau by expanding the apps we acquire into new channels like enterprise sales, affiliates, and web-to-app funnels.
Platform Risk
Beyond the above factors, apps face unique ecosystem risks that impact valuation multiples:
Algorithm Volatility
Fads and Category Shifts
"Sherlocking" by Platforms
A core part of our business model at Applause is systematically reducing this risk by diversifying acquisition into durable channels like web funnels and affiliate partnerships. As a portfolio, we further diversify these risks across multiple apps, sharing best practices, and building synergies.
Flexible Structures
We recognize that each founder’s objectives are different, so we offer flexible deal structures beyond just an all-cash sale. Because sellers and buyers often view future growth differently, an earnout helps bridge the valuation gap by tying part of the purchase price to the business’s post-acquisition performance. If the seller’s growth projections are achieved, they receive additional compensation through the earnout. If the growth slows, then we avoid overpaying.
Selling to Applause
We recognize that the value of a sale isn't just measured in dollars, but in the time it unlocks. For many founders we've partnered with, the transaction represented the freedom to reinvest their time into new passions, their families, or simply to decompress after years of running a company.
A valuation reflects not just what your business is today, but the investment and risk required for Applause to win with the company tomorrow. Partnering with us provides the capital and expertise to professionalize the business, re-accelerate revenue growth with new traffic channels, challenge larger competitors, and realize the full potential of every app that we acquire.
