A software founder friend in Phoenix just asked me this common question:

“Should I be responding to inbound acquisition requests that ask about our EBITDA?”

His company will either double or triple in revenues this year. From single-digit millions of revenue to double-digit millions this year.

Manageable 100%+ growth with a little outside funding and no funding needed is a great place to be.

Founders of growing software companies get lots of interest from investors and potential acquirers, primarily private equity “roll-up” financial acquirers and VC funders.

Here’s what I told him:

1) Should a founder respond to inbound acquisition and funding inquiries at all?

This depends on what they think you’ll need in the next couple of years, which takes some planning, soul-searching, and market-timing guessing.

– Some founders at this stage ignore these requests altogether. No need for funding and no desire to sell their companies.

– Other founders respond to a few of these inquiries after checking out the source and seeing there could be some future fit. Just a preliminary conversation to build relationships and learn things. Just don’t reveal private details in email or on these calls.

– If a big strategic player or premier VC in your space calls the CEO and “wants to talk,” it’s useful to have a polite exploration call. These are the high-potential inbound calls that tired founders dream about. They don’t happen very often, but they do happen. Mostly as you grow revenues over $10M ARR.

2) What if a potential acquirer asks about EBITDA?

I told my founder friend to ignore these requests.

If they mention EBITDA, they are the wrong type of partners altogether for a fast-growth software company.

EBITDA is a fancy finance acronym for “earnings before interest, taxes, depreciation, and amortization.” It’s your operating profit before all the accounting gyrations that big companies have.

I know this software company doesn’t have any of those accounting complications. They are investing all their revenue to grow faster, so there are minimal profits and taxes.

Asking about EBITDA really means, “Are you a slow-growth business with complicated accounting and high profits?” Like a successful dental practice or a restaurant.

It also means “We are a low-value financial buyer that buys profit streams.” That’s how most non-tech companies are sold and bought: as a multiple of earnings/profit.

But SaaS and software companies are bought and invested in for multiples of revenue, not multiples of profit.

Something like 5X revenues to 15X right now for real SaaS companies, depending.

Taking high profits means you are not investing to grow revenues faster.

And high-value acquirers and investors aren’t buying your company for your previous profit stream.

They are buying growth potential since their game is revenue growth too.

Even most public software companies aren’t valued on multiples of profit, just efficient revenue growth.