SaaS M&A is much harder than you think

We spoke to an investment banker yesterday about his view of the SaaS market.  Some of the learnings he shared where surprising, and a departure from what most bankers and investors will tell you.  Because the conversation was so candid and not a glowing view of SaaS, he’ll remain anonymous for purposes of this article, but we believe his views should definitely be taken seriously.


Strategics want size.  For strategic acquirers to take you seriously and pay a strategic multiple, you need to have annual recurring revenue of at least $20mm per year, and for some like Salesforce, it’s closer to $50mm.  If you’re under the $20mm mark, your product had better be of extreme importance to the strategics’ strategy.


Burning millions doesn’t work anymore.  Acquirers, especially private equity, are becoming more sensitive to burn.  Gone are the days when you can make a bonfire with the cash but point to strong growth as the offset.  Private equity/non-strategics will include that future burn as part of the purchase price and will reduce your valuation as a result, especially if you are going to be their platform and there aren’t costs that can be immediately cut.


2x to 4x ARR happens a lot.  It’s not uncommon to see a company trade for 2x to 4x current annualized recurring revenue if the buyer isn’t strategic, and 5x to 6x if the buyer is strategic.   If you’re distressed, 1x to 2x will be the bid.


Customer base matters a lot.  If your customers are SMB or if you have a churn issue, you actually may not get a bid at all and it certainly wont be a 5x+ valuation.  The banker we spoke to specifically mentioned he believes recurring revenue from SMBs trades at 2x.  SMB exposure just isn’t interesting to many firms, especially if it has net churn.  If you can, it’s critical to make sure your customer base is targeting the enterprise and/or is upgrading much more than it churns.


Strategics need a relationship.  If you want to get acquired by a strategic, you need to start developing that relationship 2 to 3 years in advance.  Strategics do not move quickly, they want to know you and your product intimately, they want to know how their customers interact with your product in conjunction with theirs, and the number of key personnel you’ll need to impress spans the organization – you’ll need to win over members of the product team, CTO, and engineering, in addition to the CEO and corp dev.  For a private equity or non-strategic buyer, you just need to win over the principals.  As such, selling to a private equity firm is a 6 month process whereas selling to a strategic is a multi-year endeavor.


Horizontal over vertical. Private equity and non-strategic buyers prefer large markets.  That means products that focus on a specific vertical may not garner as much attention as those that are horizontal, serving multiple industries and therefore having a much larger addressable market. Go horizontal if you can, because being vertical means you’re severely limiting the number of acquirers who could ultimately be interested – you do not want to limit yourself to only strategic acquirers, especially if you don’t have deep and long running relationships with those strategics.


My call with the banker was pretty humbling and a big departure from the excitement that many venture investors and bankers seem to exude.  The conversation was candid though, and I do believe his points were valid for the vast majority of SaaS businesses.


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