Searcher Economics on SaaS

searcher profile

August 02, 2023

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Columbus, OH, USA

Does anyone have a good read on standard/market economics for SaaS search deals if you're self-funded? We've heard 2% transaction fee (with at least 50% rolled into equity in the target) and then anywhere from 75% (searcher): 25% PE Firm on the carry promote to 25% (searcher) and 75% PE Firm... Any recent market data is helpful and appreciated! Assuming it's a profitable SaaS deal and debt will likely be used on the transaction.

6
19
190
Replies
19
commentor profile
Reply by a searcher
from Columbia University in New York, NY, USA
Like others have said, any deal structure can work so long as it gets investors' interested. It might help to think about three kinds of outcomes and consider what financing structures can lead to which: (1) Searcher gets ~70%+ equity; (2) searcher gets ~25% equity; (3) searcher gets a slim majority (~51%). Obviously, you want more equity, but you need to provide attractive returns to investors.

Some drivers of your financing structure:
1) What's the EBIDTA multiple? The lower the multiple, the more debt you can pile on. This increases IRR for investors without requiring them to take as high a stake.
2) What's the overall deal size? To earn a majority stake, searchers typically take a personal guarantee (PG), i.e., an SBA loan. That limits your deal size to ~$6M, or perhaps ~$10M if you add a conventional loan to the mix.

Unless you can finance a deal with debt up to ~80%, and often with a PG, it is difficult to make the investors' economics work such that you end up with more than 25% common equity. And to make matters more difficult, you often need to assume a high amount of growth in SaaS given the high entry multiple. That constricts your capital further - you don't want to take out a lot of debt if you need cash flow to fund growth.

In short, you can finance a SaaS deal just like any other, but the high EBIDTA multiples mean that (a) it's harder to pay off a high debt load - especially when funding growth; and (b) you have to aim for smaller starting EBIDTA if you limit your deal size to what the SBA can fund. For those reasons, you increase your possible targets substantially by taking on less debt, targeting slightly larger EBIDTA companies, and settling for a max 25% common equity stake.
commentor profile
Reply by a searcher
from University of Georgia in Greenville, SC, USA
I just went through this on a self-funded SaaS deal. When I started my search for investors, I heard all over the place that your terms can be whatever you want, but the reality is that there are common terms that all investors familiar with the EtA space are looking for. There is certainly wiggle room around those terms though. I'd highly recommend starting at favorable (to you) terms near this market rate and seeing the responses you're getting.

As for market rates, I heard from several investors that they commonly see deals for 35% IRR and those don't cut it anymore in lieu of 40%-50% IRR. They are getting offers of 8%-15% preferred return and a 1.5X-2X step up in equity after capital is returned.

Obviously, the amount of debt you bring into the deal, your growth rate, and your growth capital will affect your IRR.

I'm happy to hop on a call and tell you my experience from the searcher's side.
commentor profile
+17 more replies.
Join the discussion