The easy-money days for software-as-a-service companies are over.
For years, SaaS firms had a Wall Street-ready story: customers subscribe, revenue rolls in, and profits can wait.
Not anymore.
With growth cooling and artificial intelligence threatening to make some software cheaper, easier to copy or less essential, investors, lenders and auditors are demanding something more than slick “recurring revenue” pitches.
They want proof.
Proof customers are sticking around. Proof margins work. Proof cash flow is real. Proof those big balance-sheet values still hold up.
“What changed is, first of all, growth,” David Khalil, chief financial officer of saas.group, said in an April 27, 2026, interview with Thomson Reuters. “2021, 2022, the average public SaaS company probably was still kind of growing 30% per year, and now we are sitting in the low teens when it comes to growth rates.”
That slowdown is forcing a blunt reassessment of the subscription-software boom.
Recurring revenue is still valuable—but only if it actually recurs.
And only if it eventually turns into profit.
The SaaS Growth Story Hits a Wall
For years, fast-growing software companies could dodge hard questions about profits.
The pitch was simple: spend now, grow fast, make money later.
Investors bought it because subscription software was supposed to scale beautifully. Build the product once, keep adding customers, and watch the revenue pile up.
But now, finance chiefs say investors are digging into the quality of that revenue.
Matthias Steinberg, chief financial officer at Ottawa-based AI financial-oversight firm MindBridge, said the key question is basic: how good is the revenue?
“Key is to determine the quality of the revenue,” Steinberg said by email.
That means not all SaaS sales are equal.
A company can post rising revenue while customers are quietly leaving, demanding discounts or chewing up support costs. Another company may grow more slowly but keep customers for years because its software is critical.
On paper, both can look healthy. Under the hood, they are worlds apart.
The first thing investors are watching is retention.
Gross revenue retention shows how much recurring revenue a company keeps before upsells. Net revenue retention shows whether existing customers are spending more—or less—over time.
Gross revenue retention, Steinberg said, is “a strong indicator of the stickiness of a product driven by value, switching costs and mission-criticality.”
That means if customers can’t run their business without the software, that’s good. If they can dump it, replace it or squeeze the vendor for discounts, the revenue may not be worth as much as advertised.
Auditors Start Kicking the Tires
The tougher market is also hitting companies that bought software firms during the boom.
When a company buys another business, it often records goodwill—an accounting asset created when the buyer pays more than the value of the target’s identifiable net assets.
During the SaaS frenzy, buyers paid rich prices based on big assumptions: fast growth, sticky customers, fat margins and years of future profits.
Now auditors and lenders want to know whether those assumptions still make sense.
Khalil sees that pressure up close. Saas.group buys and operates profitable business-to-business SaaS companies, usually with $2 million to $10 million in annual recurring revenue. The company has been around for roughly 10 years, has completed 25 acquisitions and has more than $100 million in annual recurring revenue, according to Khalil.
Even so, auditors are asking harder questions.
“If finance teams, for instance, get into conversations with auditors or with lenders, they’re being asked about the terminal value of their businesses,” Khalil said.
Terminal value is what a business is expected to be worth over the long haul. If growth slows, margins shrink or customers become less reliable, that long-term value can take a hit.
“We are, for instance, being challenged by our auditors whether the goodwill that we are carrying for our acquisitions on the balance sheet, whether that is still realistic,” Khalil said.
Steinberg said lenders are tightening up, too.
“A lot more scrutiny is put on the analysis of the quality of revenue and more questions are asked about the sustainability of this revenue,” he said.
In other words: companies that bought software assets at boom-time prices now have to prove they didn’t overpay.
Cash Flow: “Vanity Number”
Profit isn’t the only number under the microscope. Cash flow is getting a hard look, too.
A favorite SaaS yardstick is the Rule of 40: add revenue growth to free cash flow margin. If the total hits 40 or higher, investors usually see a strong business.
“Everyone who sits north of Rule of 40 is generally regarded in the SaaS business as a company of exceptional quality,” Khalil said.
But Khalil warned that free cash flow can be misleading.
“Free cash flow is the biggest vanity number in software subscription businesses,” he said.
Why? Stock-based compensation.
Software companies often pay employees partly in shares or options. That keeps cash expenses lower in the short term, making free cash flow look better. But it still costs shareholders, because their ownership can be diluted.
Khalil said he would adjust Rule of 40 calculations to account for stock-based compensation.
Steinberg said companies often use adjusted metrics in investor presentations. That isn’t automatically a problem. But it can become one when companies aggressively strip out costs they call one-time, unusual or non-core.
“Operating cashflow is key,” Steinberg said.
His advice: show investors both versions—but internally, treat stock-based compensation like a real cost.
The larger point: cash flow has to be durable. It can’t just look good because a company is paying workers in stock, delaying spending or collecting customer payments upfront.
Margins Tell the Real Story
Margins are another stress test.
The classic software promise is that once the product is built, serving each new customer should be cheap. That’s what makes great SaaS companies so valuable: revenue can rise faster than costs.
But not every software company lives up to that dream.
“Are margins expanding, stable or declining?” Steinberg said.
If revenue is growing but losses are growing too, investors have a problem.
Heavy hosting costs, support expenses and implementation work can be warning signs. They may show the product isn’t as automated or scalable as advertised.
If every new customer requires custom work, hand-holding or expensive support, the company may look less like a software powerhouse and more like a services shop with a subscription label slapped on top.
“When growth drives complexity and manual intervention, it is much lower quality than truly scalable revenue,” Steinberg said.
Investors are also watching capitalized software development costs. Some companies can put development spending on the balance sheet instead of expensing it immediately, which can make near-term profit look better.
That accounting treatment can be legitimate. But it can also raise eyebrows if used too aggressively.
Steinberg said red flags include aggressive assumptions, high capitalization rates, changes in amortization schedules and a widening gap between EBITDA and cash flow.
Put plainly: some companies may be making today’s profits look better by pushing costs into tomorrow.
Khalil put it even more directly.
“The point of running a business is to eventually turn a profit,” he said.
AI Raises the Stakes
Artificial intelligence has now become a major risk factor for SaaS companies.
The question is no longer just whether a software company is using AI. It’s whether AI makes the company stronger—or makes its product easier to replace.
Khalil said investors are asking whether AI can improve productivity and whether companies can charge customers for AI features.
But the bigger danger may come when customers renew.
Some buyers may argue that AI lets them build similar tools themselves, Khalil said. That gives customers leverage to demand discounts—or threaten to walk.
He said customers may claim they can code a replacement in “three or four days.”
That may be nonsense for mission-critical software buried deep inside a company’s operations. But for narrow tools with little differentiation, the threat is real.
Even the perception that software is easy to replace can change renewal talks. Customers may push harder on price, demand more features or question whether they need the product at all.
If that pressure builds, it will hit the numbers fast: weaker renewals, heavier discounts, lower retention, tighter margins and shakier cash flow.
That is why AI is now part of the accounting story. It can change the assumptions behind revenue, growth and long-term value.
The Bottom Line
The SaaS sector is growing up—and getting grilled.
The old pitch of “trust us, the revenue is recurring” won’t cut it anymore.
Growth still matters. Subscription revenue still matters. But investors, lenders and auditors want to see the business underneath.
The new test is simple: customers must stay, margins must scale, cash flow must be real and balance sheets must survive scrutiny.
Recurring revenue is still a prize. But only if it actually comes back.
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