The SaaS M&A Report

We recently got Software Equity Group’s SaaS M&A Snapshot for Q2. SEG is a boutique investment bank focused on M&A for SaaS companies and they put out fantastic data every quarter on what they’re seeing in the market. They close 8 to 10 deals per year with transactions ranging in size from $15 million to $100’s of millions. Key observations from Q2’s report is as follows:

Deal volume is still high. Transaction volume remains at record highs through 2018, and is tracking 11% higher than 2017.

Multiples are good. The median revenue multiple is 4.5x. The median has remained above 4x since 2016 except for Q4 2016 when it dipped to 3.8x. “Consistent with past quarters, approximately one third of SaaS targets were acquired for 3.0x or less. Meanwhile, approximately one third of targets were acquired between 3.0x and 6.0x, and the remaining balance were valued at 6.0x or greater.”

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.

Size drives multiples. “Valuation is largely driven by company size. Organizations exhibiting scale are generally rewarded with higher multiples. Over the past 3 years, companies with revenue between $50M-$100M posted the highest median multiple (5.2x EV/Revenue). 40% of SaaS targets had 50 employees or less. Nearly 40% had between 50–200 employees, and the remaining 20% had greater than 200 employees.” Notably, private equity firms or private equity backed strategics represent 61% of transactions whereas publicly traded strategics represent the other 39%.

In M&A, companies are valued based off of LTM revenue (last twelve months), not annualized recurring revenue or even forward revenue. SEG tries to push acquirers to apply multiples to these higher revenue figures, but 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.

Profitability. If you’re growing under 40% per year or even slower, strive for a 30%+ EBITDA margin. 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. If your product is good enough, many acquirers will overlook major shortcomings on the financial side.

-M&A is Unpredictable. 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. 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. 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.

Hiring a great banker is critical to maximizing value in an M&A process, and banks like Software Equity Group ( and Pagemill Partners ( are ones we like a lot for SaaS businesses. If you want an intro, let me know.