How CAGR is calculated
CAGR = ((Ending value ÷ Starting value) ^ (1 ÷ Years) − 1) × 100
Compound Annual Growth Rate is the annualized rate at which a value would have grown each year to get from the starting value to the ending value — assuming growth compounded uniformly each year. It smooths out year-to-year volatility into a single comparable rate.
Unlike simple growth rate (which just divides the total change by the starting value), CAGR accounts for compounding. A business that grew from $500,000 to $750,000 over three years did not grow 50% per year — it grew at a 14.47% compounded annual rate, meaning each year's growth built on the prior year's larger base.
CAGR benchmarks for small businesses
| Annual CAGR | What it means |
|---|---|
| ≥25% | Exceptional — high-growth startups, strong product-market fit, expansion into new markets |
| 15–24% | Strong — above-average growth, typical of well-run businesses in expanding markets |
| 8–14% | Healthy — solid growth, ahead of inflation and most macro benchmarks |
| 3–7% | Moderate — keeping pace with the economy; acceptable for mature businesses |
| 0–2% | Flat — roughly matching inflation; may signal a plateauing business |
| <0% | Declining — revenue or value is shrinking year over year |
Industry context matters. A 5% CAGR is excellent for a grocery distribution business and disappointing for a software-as-a-service company. Compare your growth rate to your sector's typical range rather than a universal threshold.
How lenders use revenue growth rate
Trend analysis: When underwriting a business loan, lenders look at two to three years of revenue history to assess trajectory. A business with consistent 15% annual growth is a different credit risk than one with flat or declining revenue — even if both have the same current-year EBITDA and DSCR. The growth trend signals whether the business is gaining or losing momentum.
SBA loans: SBA lenders are required to project future cash flow to assess repayment ability. Revenue CAGR informs those projections — a lender will discount aggressive growth assumptions and apply a conservative growth rate (often 3–5%) when building the three-year repayment model.
Business valuation: Buyers and valuation analysts apply higher EBITDA multiples to faster-growing businesses. A company growing at 25% per year may command an 8× EBITDA multiple while a comparable flat business gets 4×. The business valuation calculator lets you apply a specific multiple; CAGR is a key input for choosing which multiple is appropriate.
Worked examples
Example 1 — landscaping company revenue growth:
| Year | Revenue |
|---|---|
| 2022 (start) | $320,000 |
| 2023 | $380,000 |
| 2024 | $430,000 |
| 2025 (end) | $510,000 |
CAGR = ((510,000 ÷ 320,000) ^ (1 ÷ 3) − 1) × 100 = 16.87% per year — strong. Total growth over the three years was 59.4%. Even though 2024 showed a slower year ($430k vs $380k was only 13% growth), the three-year CAGR reflects the overall trajectory rather than a single year's performance.
Example 2 — SaaS company projecting at target growth rate:
A software company with $200,000 in current annual recurring revenue wants to know what the business looks like in four years if it can sustain a 30% CAGR (its current growth rate) vs. a conservative 15% CAGR:
| Scenario | CAGR | Revenue in 4 years |
|---|---|---|
| Current trajectory | 30% | $577,760 |
| Conservative | 15% | $349,980 |
The gap between 30% and 15% CAGR over four years is $227,780 in projected revenue — a meaningful difference when a lender or buyer is sizing the business's future earning power. Use the target CAGR field to model both scenarios.
Assumptions and limitations
- CAGR assumes uniform compounding. The actual path from start to end may have been uneven — a flat year followed by a breakout year, or vice versa. CAGR smooths this into a single number, which is useful for comparisons but hides volatility. A business with 30%, −10%, 30% annual growth over three years has the same CAGR as one that grew 14% each year — but they are very different businesses.
- Total growth rate vs. CAGR. The absolute growth rate (total change divided by starting value) is not the same as CAGR. A business that doubled over five years had a 100% total growth rate and a 14.87% CAGR. Confusing the two is a common error in pitch decks and lender presentations.
- CAGR does not measure profitability. Revenue CAGR and profit CAGR can diverge sharply. A business growing revenue at 20% per year while margins compress is on a different trajectory than one growing at 20% with stable margins. Pair CAGR with profit margin and EBITDA trends for a complete picture.
Frequently asked questions
- What is a good CAGR for a small business?
- For an established small business, 8–15% annual revenue growth is generally considered healthy. Startups and high-growth companies often target 25–50%+ in early years. For context, the S&P 500's long-run average return is roughly 10% per year — a small business growing faster than that is outperforming a passive investment. That said, industry matters more than a universal threshold: a 5% CAGR may be excellent for a stable service business and weak for a software product.
- Can CAGR be negative?
- Yes. A negative CAGR means the ending value is lower than the starting value — the metric has been declining on average. For revenue, a negative CAGR is a warning signal for lenders and buyers. Most lenders will want to understand the cause and see evidence the decline has reversed before approving growth-oriented financing.
- How does CAGR differ from average annual growth rate (AAGR)?
- AAGR (also called the arithmetic mean of annual growth rates) simply averages each year's year-over-year growth percentage. It is easy to calculate but can overstate actual performance — a year of 100% growth followed by a year of −50% growth gives an AAGR of 25%, but the business is back to exactly where it started (CAGR = 0%). CAGR is more accurate because it accounts for the actual start and end values rather than averaging percentage changes.
- Should I use revenue CAGR or EBITDA CAGR when approaching a lender?
- Both. Revenue CAGR shows top-line momentum; EBITDA CAGR shows whether profitability is keeping pace. A business with strong revenue CAGR but flat or declining EBITDA CAGR is growing its way into margin compression — lenders and buyers will notice. Ideally, present three years of both metrics to demonstrate consistent improvement on each line.
Sources
- Investopedia — "Compound Annual Growth Rate (CAGR)" (accessed 2026-10-04)
- Corporate Finance Institute — "CAGR Formula" (accessed 2026-10-04)