Multiples on SaaS businesses
April 30, 2024
by a searcher from Dartmouth College - Tuck School of Business at Dartmouth in Avinguda de la Granvia, 8, 08075 L'Hospitalet de Llobregat, Barcelona, España
Hi,
We recently got in touch with a SaaS company that we find very interesting. The company develops and sells fleet tracking software, and 90% of its revenue is fully recurring. The owner is expecting a valuation based on ARR, but since we haven't done any deal like that, we're trying to get some insight from those who have.
The company is growing over 30% YoY, so we think the owner expects what could be considered a high valuation for a traditional search fund deal. Some thoughts that come to mind:
- Let's imagine the owner wants 12x EBITDA (whatever ARR multiple that is), and given the company growth the IRR will surpass 35% if we also sell at 12x. But with such high multiple, that's not guaranteed, so how do you think of that in regards to the valuation to acquire it?
- Even if the returns look great, some investors are usually skeptical of high growth deals with high valuations. What's your experience there?
I'm reading you! Thanks
from University of Dublin, Trinity College in Dublin, Ireland
What is their reason for doing this?
Is this reason an external and essential motivator? Eg. "I have to exit because I have to move across the world for family reasons / need the money on abc timeline for xyz essential expense I need to pay /my health has failed such that I'm unable to give the business the energy and attention it needs" etc.
If there isn't one present and they just "think it is time to move on and do something new" and what that new thing is isn't present or obvious then they could be wasting you time right now.
The hbs "how to buy a small business" book has some good tools to assess the above - help you to take back and structure your thinking on it.
If their intent is qualified then you need to have a 2 part conversation with them:
1. What is your dream outcome / result here today and 1 yr from now? Draw me a picture of what that looks like - what has been achieved? What has changed? How do you feel about it now all this awesome stuff has happened?
2. OK - how do we get you there from here - let me show you what resources and challenges I'm working with on my side. I've got a couple of theories on how we can build this together - hear me out on them and then I'd love to hear you gut reaction feedback on it, see of it fits or we need to adjust the solution for the best win win fit.
You need to understand why they are expecting 12x ARR - industry standard assumption? This is the exit we want and deserve as founders? If so then they are signing their team up for "to the meeting on or die trying" growth path and they need to seek out vcs targeting companies like theirs, or other vc backed startups who would like to fold their growth and revenue numbers into theirs.
If they want a vc exit and you are not offering this then it may not be a fit.
Understand the motivations and expectations behind their numbers and you'll uncover what path forward is possible - qualify them and yourself, hard!
from University of Pennsylvania in San Francisco, CA, USA
https://www.linkedin.com/posts/scottweavil_saas-activity-7180585991307476992-CSXo?utm_source=share&utm_medium=member_desktop