M&A multiples in Q2
Software Equity Group is an investment bank that puts out research on SaaS markets. They just released their latest report on Q2. A summary is below but the full report may be found at https://softwareequity.com/research/. SEG does great work and has sold companies for us before.
M&A volume is still strong. There were 897 deals in Q2, up slightly from Q1. Similarly Q1 was a strong improvement over Q4, “growing 21% over 4Q22.” However we note that H2 2023 volume of deals (855+897) was well below H1 2022 (1120+1014).
Late 2021 and early 2022 saw crazy volumes that were driven by abnormal euphoria. 2019 and 2020 were much more normalized and healthy periods. By the numbers, Q2 2023 (897 deals) is above the Q2 2019 level (671), Q2 2020 level (599), and even Q2 2021 level (802). In summary, while we may be down from 2022, the market is still healthy relative to a longer historical lookback to Q1 2019. As SEG puts it, “end of 2021 and early 2022. Despite this decrease, software deal activity for the first half of 2023 exceeded all prior years except 2022, which was a record breaking year. An estimate for annual software M&A in 2023 expects the year to finish just ahead of 2021’s total.” Volume has normalized.
Multiples are down to 5.6x LTM revenue on average and 4.7x on median. While they may be down from 2022, we’d note that 5.6x is in line with multiples during 2019 and early 2020, when the software market was saner. SEG’s commentary here: “Despite 2Q23’s median multiple, SEG continues to see exceptional outcomes being commanded primarily from businesses exhibiting top tier KPIs (strong rule of 40 weighted evenly between growth and profitability, strong gross retention, etc.). Premium multiples are also consistently rewarded to businesses serving durable customer bases with strong product differentiation and a competitive moat.”
Private equity volume is at a record. PE deals accounted for 61.3% of Q2 deals. “For context into PE’s increasing footprint in SaaS M&A, 2Q18 had PE buyer s r epresent a mere 47% of SaaS M&A deals. The growth of PE’s relative take of SaaS M&A deals is particularly impressive considering the sheer magnitude of transactions taking place today.”
Verticals and industries. “Vertically focused businesses comprised 46% of all SaaS deals in 2Q23, down slightly from last quarter’s record 49%.” Additionally, “Financial Services led all product categories this quarter, representing 18.9% of SaaS deals.”
Our view: the market is normalizing to a very healthy level. The great M&A market we saw in late 2021 and early 2022 may be over, but the market is still good. We’d call it healthy. Big thanks to SEG for putting the data together. Please reach out to them to learn more about their investment banking practice. Thank you for your readership.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at firstname.lastname@example.org. We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.