Does the Rule of 40 still matter for SaaS valuations in 2026? (full copy), Ask Jason Kirby

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Does the Rule of 40 Still Matter for SaaS Valuations in 2026?

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Kroll's Summer 2026 report changed the answer. Margins above 25% add almost no premium today. Here is what actually drives your software valuation now.

ANSWER (Ask My Board format. Jason Kirby voice)

Short answer: Partially. Growth matters far more than it used to. Margin above 25% adds almost nothing.

Longer answer:

The Rule of 40 is still a useful filter. but it has been quietly repriced.

Kroll's Summer 2026 software valuation report published data that most founders have not yet absorbed: in today's M&A market, margins above roughly 25% add almost zero additional multiple. The premium goes to growth. Growth rate is effectively the entire variable.

That changes the math significantly.

What the old rule said:

A company at 20% growth + 20% margin (Rule of 40 = 40) was equivalent to a company at 30% growth + 10% margin (Rule of 40 = 40). Both cleared the threshold. Both got similar treatment.

What the market is pricing today:

The 30% growth + 10% margin company gets a meaningfully higher multiple than the 20% growth + 20% margin company. even though both hit Rule of 40.

Buyers are pattern-matching to growth trajectory. Margins are table stakes at 25%+. They are not a differentiator.

The three buyer classes (and which one cares about your margins)

This is where founders get confused, because the answer is not uniform:

Strategic acquirers (a large company buying you for product, distribution, or talent): primarily buying growth rate and strategic fit. Margins matter only if they are negative and alarming.

Growth equity / late-stage VC funds (Thoma Bravo, Vista, growth funds): buying compounding growth. They will optimize margins themselves post-close. Your margin expansion story is largely irrelevant. they want the growth engine.

Private equity / traditional buyout (mid-market PE, ETA acquirers): this is where margins still matter. PE firms buying cash-flowing software businesses price on EBITDA multiples. If PE is your buyer, the old Rule of 40 logic still holds. In fact, for PE buyers, margin is often more important than growth rate.

The mistake most founders make: assuming all buyers use the same framework. They do not.

What to do with this information in 2026

If you have been optimizing for margin expansion at the expense of growth. and you want to exit in the next 18-24 months. you have a positioning problem, not a business problem.

The question is whether your buyer class cares about what you built. PE buyers may reward your profitability. Strategic and growth equity buyers almost certainly will not pay a premium for it.

Know which pool of buyers you are targeting before you optimize your P&L for a sale. The answer changes what you should be doing today.

The one exception worth knowing

In a risk-off environment. recession, credit contraction, rate spikes. profitability returns as a buyer priority. The Kroll data reflects today's market. That market changes.

If you are planning a 2027-2028 exit, keep margin discipline. If you are exiting in the next 12-18 months in the current environment, growth is your story.

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STRUCTURED DATA SNIPPET (FAQ schema. for dev implementation)

Q: Does the Rule of 40 still matter for SaaS valuations? A: Partially. Kroll Summer 2026 data shows margins above 25% add almost no valuation premium today. Growth rate is the primary driver for strategic and growth equity buyers. PE buyers are the exception. they still price on EBITDA multiples where profitability matters more.

Q: What replaced the Rule of 40? A: Nothing replaced it entirely. The market now weights growth rate far more heavily than margin. A company at 60% growth with 15% margin typically commands a higher multiple than a company at 25% growth with 40% margin. The Rule of 40 still clears a floor, but it no longer differentiates at the top end.

Q: Is Rule of 40 still relevant for PE-backed software acquisitions? A: Yes. PE firms buying cash-flowing software assets still use EBITDA multiples as a primary pricing framework. For PE exits, profitability remains important. The Rule of 40 repricing applies most strongly to strategic acquisitions and growth equity. not traditional PE buyouts.

NOTES FOR JASON / DEV

Fresh news peg: Kroll Summer 2026 (SaaStr, Sep 1, 2026). reference credibility high
Target keywords: "rule of 40 SaaS valuation 2026", "rule of 40 still relevant", "SaaS profitability vs growth valuation"
Estimated search volume: 1,200-2,000/month, spiking on SaaStr coverage
Word count: ~700 words (page body). good for SEO without being padded
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CTA: Ask My Board, not Thunder directly

Does the Rule of 40 still matter for SaaS valuations in 2026? (full copy)