An investment banker's view on the necessary milestones for selling a SaaS business

Recently we met with investment banker Allen Cinzori of Software Equity Group.  SEG is a boutique investment bank focused on M&A for SaaS companies.  They close 8 to 10 deals per year with transactions ranging in size from $15 million to $100’s of millions.  In our conversation Allen shared their marketing deck with us, and one of the pages highlighted the key statistics you need to achieve in order to earn a premium multiple upon exit.   We found this to be a very informative page, so we’re scanned and printed it for you here.

 

 

Key observations:

 

-Range of Multiples.  Notice that the columns highlight a range of multiples from 2x to 4x trailing twelve months revenue.  In our conversation, I asked Allen what he considers to be a premium multiple.  He replied if you’re a top performing company with at least $3mm of annual revenue, you can expect to trade for 4x to 5x.  In rare cases where an acquirer has to have you and you can afford to walk away from the deal, you may be able to do 8x to 10x, but that’s truly a unique situation.  

 

-Type of Revenue.  In M&A, companies are valued based off of LTM revenue (last twelve months), not annualized recurring revenue or even forward revenue.  Allen tries to push acquirers to apply multiples to these higher revenue figures, but he says it’s atypical.  Depending on how fast you’re growing, there could be a big difference in value between 5x LTM revenue and 5x ARR. 

 

-Growth. In order to earn a premium multiple, strive for maintaining at least 40%year over year growth with at least 90% of that revenue coming from contracted recurring streams.  These are two of the most important statistics highlighted above.

 

-Profitability.  One row that stood out to me was the EBITDA margin.  Profitability matters! Strive for a 30%+ EBITDA margin, especially if you’re growing under 40% year over year.  If you’re not profitable, growth needs to be well in excess of 40% to offset, or you’ve got to be able to make a case that you could be profitable if you wanted to be, but you’re re-investing cash in sales and marketing, burning cash in order to spike growth. 

 

-Qualitative Factors.  Non-financial factors such as the age of the tech, strength of the team, and the uniqueness of the product all come into play.  Indeed when speaking with Allen, he mentioned that if your product is good enough, many acquirers will overlook major shortcomings on the financial side.  This kind of M&A is called a “Product Sale” and while rare, it’s one of the factors that can really drive a premium multiple. 

 

-M&A is Unpredictable.  Allen mentioned to us that M&A can take anywhere from 2 months to 2 years depending on what type of process is run (abbreviated versus full) and what the interest level is for your company.  Allen also made an important point: when an acquirer solicits you and you say ‘no’, that acquirer doesn’t just wait around for you to decide to sell.  They either build your tech themselves or they acquire a competitor, even if that competitor isn’t as good as you.  Once either of those two things happens, consider that acquirer gone in the future.  Indeed we’ve seen this happen first hand when Yahoo tried to acquire one of our portfolio companies.  We said ‘no’ believing we could get a higher price later.  Then when we were ready to sell 2 years later, Yahoo was gone as a potential acquirer as they went out and bought some of our smaller competitors. 

 

Overall we found the conversation with Allen to be very valuable.  Hiring a great banker is critical to maximizing value in an M&A process, and banks like Software Equity Group (softwareequity.com), Pagemill Partners (pmib.com), and Siemer & Associates (siemer.com) are some of our favorites.  If you want an intro, let me know.   

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