Is profitability a requirement for M&A? The data says no. We monitor every acquisition of publicly traded companies. These acquisitions are large, the data is honest and accurate, and the transactions are all cash in every instance. It’s the purest data out there (private data is bullshit and full of bias). Below are our observations.
Past 5 acquisitions. Of the past 5 acquisitions, none have generated positive EBITDA. All 5 were done by private equity firms, which usually are more sensitive to profitability than strategics.
Median margin is negative. Of the 26 transactions that have happened since December 2020, the median and average EBITDA margin is -2% and -5%. All but 6 of the transactions were done by large private equity firms, which again tend to be more sensitive to net loss.
While the data is telling us you don’t need to profitable, without a doubt, you need to be growing cash efficiently. The median growth rate of these companies is 19%, which is saying something given that median revenue at the time of acquisition was $788mm. So long as you’re generating enough net new ARR for each dollar of net loss (aim for $0.67 of net new ARR for each dollar of loss, which will result in a 1.5 year payback on burn), in our view you should keep funding the growth. Clearly, M&A will be there even if you’re unprofitable, so long as you’re cash efficient.
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 30%+. 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.