Software vs. Services vs. PE – Valuing a SaaS Target
In selling any company, especially in a deal with several potential acquirers, it is often common to separate buyers into overarching groups. In a process, these groups are highly specific, split into groups reflecting likely rationales for completing the transaction. In a recent valuation, these specific groups showed similar signs. They were either focusing on software delivery or services. We therefore decided find numerical evidence to the intuitive notion that software buyers pay much better than those in services.
The graph below only includes transactions of buyers in the above categories purchasing a SaaS target. In the last 2.5 years, multiples have remained fairly stable, hovering around 4.0x, while deal flow is slightly down in the last half of 2016.
SaaS valuation metrics, 2014-2016
The graph below is an excerpt from our SaaS report H12017 and since the report has been discontinued. To download our latest Enterprise Software report which encompasses SaaS & Cloud please click here.
Sales multiples paid by acquirers of SaaS targets
Digging through more than a thousand transactions from 2012 until today, software companies are willing to pay much more than others. In comparison with the overall metrics, it becomes clear that the software group would be the most attractive to approach in achieving the highest multiples in a sale.
Perhaps more surprising is the willingness of private equities to pay fairly high multiples for SaaS companies. In addition to just beating services, the trailing multiples have actually been increasing over the last 2.5 years from 2.4x in 2015 to the current 3.5x median.
Services companies are paying very similar to that of private equities on EV/S metrics. With EBITDA metrics on the other hand services buyers show a very interesting trend. While software companies and PE’s are willing to acquire SaaS targets with little to no EBITDA, services companies give a very narrow range of 11.5x-12.9x EV/EBITDA including the second and third quartile.
Conclusion
Our recent research on buyer multiple appetite for SaaS targets have revealed that:
- PE buyers offer better multiples based on both sales and EBITDA metrics, enabling current owners to grow and gain extra upside alongside their new private equity buyers.
- If you are an owner of a company with SaaS delivery method, ensure you familiarize yourself with potential software buyers that may end up paying the highest multiples for your company
- Services companies are less likely to pick up SaaS targets with little to no EBITDA margins.
In selling any company, especially in a deal with several potential acquirers, it is often common to separate buyers into overarching groups. In a process, these groups are highly specific, split into groups reflecting likely rationales for completing the transaction. In a recent valuation, these specific groups showed similar signs. They were either focusing on software delivery or services. We therefore decided find numerical evidence to the intuitive notion that software buyers pay much better than those in services.
The graph below only includes transactions of buyers in the above categories purchasing a SaaS target. In the last 2.5 years, multiples have remained fairly stable, hovering around 4.0x, while deal flow is slightly down in the last half of 2016.
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