Deal volume spiked 81% in Q3, after cratering 30% in Q2. There were 207 SaaS deals done in Q2 2020 versus 291 in Q2 2019. In Q3, there were 374 deals, driven by pent up demand. The previous record was 326 deals (Q3 2019).
In M&A, companies are often valued based on LTM revenue (last twelve months), not annualized recurring revenue or even forward revenue. SEG tries to push acquirers to apply multiples to these higher revenue figures, but it’s atypical. Depending on how fast you’re growing, there could be a big difference in value between 5x LTM revenue and 5x ARR.
Below are a few more general rules of M&A.
Profitability. If you’re growing under 40% per year or even slower, strive for a comfortably strong EBITDA margin (20% to 30%). If you’re not profitable, growth needs to be well in excess of 40% to offset, or you’ve got to be able to make a case that you could be profitable if you wanted to be, but you’re re-investing cash in sales and marketing burning cash in order to spike growth.
M&A is Unpredictable. M&A can take anywhere from 2 months to 2 years depending on what type of process is run (abbreviated versus full) and what the interest level is for your company. When an acquirer solicits you and you say ‘no’, that acquirer doesn’t just wait around for you to decide to sell. They either build your tech themselves or they acquire a competitor, even if that competitor isn’t as good as you. Once either of those two things happens, consider that acquirer gone in the future. We’ve seen this happen first hand when Yahoo tried to acquire one of our portfolio companies. We said ‘no’ believing we could get a higher price later. Then when we were ready to sell 2 years later, Yahoo was gone as a potential acquirer as they went out and bought some of our smaller competitors.
sammy@blossomstreetventures.com
Enjoyed this post?
Share it using the links below.