SaaS acquisition multiples

Every quarter we publish public SaaS multiples (that data is further down this blog). Alongside multiples of publicly traded SaaS companies, public SaaS acquisitions are some of the most relevant you can look at for deriving SaaS revenue multiples. These transactions are all cash, the financials are public and audited, and these are all control transactions so the data is about as pure as it gets. Below is the data for all public SaaS company acquisitions in 2021.

Only 10 exits. There have only been 10 public companies acquired since December 2020. Acquisitions of this size don’t happen often. Note that we have incomplete data for one of those companies (FireEye) because as part of the acquisition, a material subsidiary called Mandiant was spun-off ($400mm revenue of $941mm combined revenue), so we do not have all the data for FireEye as a standalone subsidiary.

Capped price. The median acquisition price of these companies was $10.4bln. There’s a lesson here: there are only so many acquirers that can spend billions in cash and/or company stock to make acquisitions. Once you get to $5bln+ in valuation, the universe of corporate acquirers (Salesforce, Microsoft, Adobe) and private equity firms (Thoma Bravo, KKR, Clearlake) that can afford you shrinks, such that IPO becomes the primary viable option. And of course, SaaS IPO’s don’t grow on trees (there were 40 in 2021). There have been no SaaS IPO’s in 2022 as the market is frozen — sellers can’t agree on valuation with institutional buyers that are needed to buoy an IPO. Interal down rounds and flat are coming for all those “unicorns”.

8x revenue. The businesses on median traded for 7.6x trailing twelve month revenue of $851mm with YOY growth of 18%. While that growth may sound low, it’s pretty impressive for companies with nearly $1bln of revenue, so any multiple discount from slower growth should be more than offset by the premium these companies receive for size and the fact that these are control investments. Another learning: it’s fun to raise money from VC at 20x revenue, but recognize that the likelihood of keeping such a high multiple at acquisition is low. It takes a lot of growth to make up for the overpayment and achieving a good return. We always recommend keeping dilution low by taking the money you need at a reasonable valuation as opposed to too much capital at a high valuation. That’s how you avoid down-rounds and restructurings.

No burn. The EBITDA burn of these companies relative to revenue was pretty negligible with a median 3% EBITDA margin.

Private equity is leading the way. Of the 10 acquisitions shown, only one was made by a strategic (Salesforce). All the rest were made by private equity, with Thoma Bravo actually making 4 of the acquisitions. Again, there are very few firms that can afford a multi-billion dollar acquisition. Not surprisingly, the highest multiple of the group is Salesforce’s, paying 33x revenue for Slack.

Non-SaaS Multiples. Below we present some of the more recent acquisitions of tech companies that aren’t SaaS. There are only 4 but a few interesting observations: 3 of the 4 were bought by a strategic, the premiums were all strong, 3 of the 4 companies were profitable, all had excellent growth.

Public SaaS Multiples

SaaS comps continue to be historically strong, but fell 24% from last quarter. Of the 123 SaaS companies we follow, the average public SaaS business is trading at 12.9x revenue while the median is 9.3x.

The gap between the average and median is 3.6x, meaning premium SaaS companies are getting outlier valuations, but that gap is lowest since Q1 2020, showing the correction in overvalued names. 47% of companies are trading at 10x revenue or greater. The data is below.

Negative EBITDA, positive cash flow. The median SaaS business had trailing twelve month revenue of $451mm, EBITDA of -$32mm, but positive operating cash flow of $41mm thanks to up-front collections on annual contracts. So long as you’re growing (the median annual growth rate is 25%), investors will overlook negative EBITDA especially if the business is cash flow positive after working capital changes.

The trend. The chart below shows median revenue multiples we’ve collected since Q4 2014. During that period, the median SaaS multiple has ranged from 4.6x to 14.1x with an average of 8.5x.

SaaS margins are still terrible. Investors and founders love saying “SaaS margins are great.” They’re not. They’re horrible. The median EBITDA margin for the companies above was -10%. Fixed costs for SaaS are terribly high and worse yet, those fixed costs are mostly people, meaning the only way to materially cut costs is layoffs.

Premium gets a premium. Premium SaaS businesses trade at premium multiples. In the data set, 58 companies trade at greater than 10x revenue, 35 trade at greater than 15x, and 22 trade at greater than 20x.

Growth is strong. The median of 25% is good given the size of these companies. The average is even better at 27%.

SaaS businesses are healthy. There is almost no debt on these businesses as banks don’t like ‘asset-lite’ businesses like software. Additionally, these companies have $452mm of cash on the balance sheet on median, plenty relative to annual burn (recall EBITDA is -$32mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $41mm); only 35 out of the 123 companies have negative cash flow. Note that 67 out of the 123 have negative EBITDA, but again that’s acceptable so long as the growth is present and cash flow overall is positive.

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