An Investment Bankers view of the SaaS Market

Software Equity Group just released their quarterly review of the SaaS market.  SEG is a well respected M&A advisory firm and investment bank, and their quarterly review of the SaaS market is well worth the read.  Below are the key take-aways from the report:

 

-SEG’s index of 69 SaaS companies they follow is trading at a median revenue multiple of 6.0x.  This is 20% higher than their multiple for Q2 2016 and the highset since Q3 2015.  SEG also notes that 21% of the companies have a multiple of 9x or greater, which is substantial.  Finally, the top quartile of companies had a median revenue multiple of 10.5x.

 

-The multiple is higher even though median growth fell to 26.4% from 32% in Q2 2016.

 

-The median EBITDA margin was -7% and the majority of the index (63%) posted GAAP losses.  That said, 72% of the group generated positive cash flow from operations given the propensity to collect cash for annual contracts up front.  Sales & marketing expense and R&D expense were 39% and 19% of revenue respectively. 

 

-SEG measures an interesting metric called the Rule of 40, which adds the growth rate and EBITDA margin of a company together.  There is a strong correlation between revenue multiple and Rule of 40. 

 

 

SEG’s report is thorough, frames multiples relative to two of the most important factors in any SaaS business (margin and growth), and shows that right now is a great time to raise money as multiples are at nearly a 2 year high. 

 

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