The state of software M&A

I met with a banker yesterday and got his take on the state of the software M&A market. The banker’s observations on the state of the SaaS M&A market are as follows:

Private equity is leading the way. Most deals this firm has completed have been majority recaps with private equity groups. PE is paying multiples that are in-line with or better than strategic acquirers, and they often close faster with better terms (fewer escrows, simpler legal docs, etc).

Profitability is important. If you’re not profitable today, acquirers are requiring profitability to be achievable within 9 to 12 months. Burn needs to be low and the path to profitability needs to be extremely clear and believable. Gross margin should be 80%+ and EBITDA margin should be no lower than -4%, and improving.

Retention is the new growth. Retention is more important than growth. Growth can be as low as 30%, so long as retention is strong. Strong retention is defined as 110%+ net and 90%+ gross. Some of this firm’s clients have actually been as high as 95% of the gross side. Gross retention is more important than net retention, because many acquirers believe they can improve upsells to drive net retention, so long as gross retention is reasonably high. Fixing gross retention is way harder than fixing net retention.

Go enterprise. Selling a software business that focuses on serving the long tail (SMB) with high churn is exceptionally hard. This banker has become extremely selective about representing companies that are SMB focused with high churn, so build your product to serve an enterprise customer base.

Multiples are strong. Solid businesses with good growth, low burn, and strong retention are trading at 7x ARR.

$6m is the new $10mm. Acquirers are no longer requiring at least $10mm of ARR. In this market, ARR can be as low as $6mm so long as your retention is strong, growth is respectable (30%+), and burn is under control.

In summary, get your retention up and your burn down, don’t sacrifice those two metrics for the sake of growth, and focus on enterprise customers.

Visit us at and email us directly with Series A or B opportunities at We invest $1mm to $1.5mm in growth rounds, inside rounds, cap table restructurings, note clean outs, and other ‘special situations’ all over the US & Canada.