We have previously discussed the increasing shift in focus towards pure profitability, but what are the other key factors being taken into account when a buyer is deciding on their next acquisition?
Deal activity in the SaaS market has undoubtedly escalated in recent months as buyers dust off their cheque books. Nevertheless, there is still a degree of caution being exercised over potential acquisitions. We have previously discussed the increasing shift in focus towards pure profitability, but what are the other key factors being taken into account when a buyer is deciding on their next acquisition?
1) The Importance of Security
There is no getting away from it, the world is now fully digital. However, although developments such as cloud-based platforms have has presented an opportunity for many SaaS businesses to grow, they also present a risk in terms of IT security. Not only are SaaS businesses storing huge amounts of customer data, their whole operation is based in the cloud. Therefore, one of the first things a buyer will test is the reliance of the systems to attacks and outages. Up to date penetration tests are a key requirement for any buyer as well as code reviews. Any issues flagged on compliance and security will be an immediate hit to headline price and could end up being a deal breaker.
2) Net Revenue Retention
Net revenue retention is the cumulative total of retained, contracted, and expanded revenue over a set period (typically one month or one year). Essentially, this bridges how successfully you are able to offset any revenue churn through upsells, cross sells and price rises amongst existing customers. This is a key metric for buyers to survey a target against, as it gives them comfort over the quality of earnings. In short, the higher the net revenue retention, the higher you can expect the multiple to be.
3) Platform Scalability
Scalability has always been key for SaaS businesses and if an acquiror can immediately plug the new company into its full customer suite, you will have a huge advantage. Thinking ahead to how your future acquiror may be able to do this will help pay off in the future as it will reduce any potential technical debt and increase multiples since buyers will face less costs to integrate. An example of this would be to start early development of multi-tenant systems (in place of single tenant) to reduce the number of software implementations and bug fixes that need to be rolled out per customer.
4) In-house Development Teams
While in-house development teams are often more expensive than outsourcing the development operation, they ensure that you keep control of your development process and are better equipped to react to changing market demands. Buyers often prefer to see in-house teams because having an internal team who know the technical architecture of a product inside and out greatly reduces the integration effort.
Of course, there is no magic bullet to attracting a trade buyer for your SaaS business - every acquiror will have a different set of criteria. Nevertheless, our experience shows that taking note of these four current trends will stand you in good stead to build your business in a way that will attract a strong exit result.
If you'd like to discuss how we can help you fund, sell or buy a business, please contact me or book an informal chat via our website
Myles Hamilton is a Director – M&A at Shaw & Co.
In October 2021, GoProposal, a major supplier of accounting and bookkeeping software, was acquired by Sage, a leading provider of finance, accounting and payroll solutions to SMEs.
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