Private equity buyers (and PE-backed strategics) are the most likely home for your SaaS business, if and when you try to sell it.
PE buyers now make up 70% of all software company acquisitions.
This change started to grow 10 years ago and is now the default path for successful software founders when they sell their companies.
Did you know that? Is anyone telling you the old way isn’t coming back?
Strategic buyers and IPOs with crazy valuations used to be the likely exit paths for successful software companies, but those are almost non-existent now.
Here are a few significant realities of the PE-exit reality for SaaS founders:
1) Don’t expect a crazy valuation when you sell your company.
PE investors and PE-backed companies don’t overpay for software companies. That’s not their game.
Great SaaS companies get acquired by PE for multiples of 5-10x revenues. Mediocre SaaS businesses (slow growth, slightly profitable) get 3-5X revenues.
Others with more services get 10-15X EBIDTA. No “greater fool” exits here. (On average; your mileage may vary.)
You can’t win raising big VC funding with these end-game multiples.
2) Healthy SaaS business = good multiples
Starting around $5M ARR and up, SaaS businesses with healthy growth (20-50% YOY), decent profits (10-30%), low churn, good revenue retention, and predictable customer acquisition get good multiples.
This is a win for SaaS founders if they didn’t raise too much outside capital and can sell it when it makes sense for them.
Most SaaS companies are not that healthy.
3) Unhealthy SaaS business = lower multiples or no exit
No growth, burning cash, churning customers, high CAC, losing market share, off trend software companies are either not bought, sold as “distressed” fixer-uppers at 1-3X, or not sold for a premium.
4) There still needs to be serious growth potential.
Savvy PE-typ[e buyers want to grow your business and sell it in 5-7 years to make their ROI on buying/investing in your company. This business needs to grow 3 times or more in revenues–after you sell it.
5) You don’t get a pile of cash and then walk away.
PE buyers almost always buy majority or minority positions in your company, but not all of it. This is the new reality for PE-led acquisitions: It’s almost never a 100% purchase of your total equity.
This also means you’re sticking around to run it for a while with new bosses and new rules. You win your “second bite of the apple” prize when it is sold again, and your PE investors win. So you have to play nice whether you are still on the team or not.
This PE end game is very different from the old “raise as much as you can” VC funding game with a crazy IPO or big strategic exit. That still happens, but so rarely that it’s not worth betting on for most SaaS founders.
The game has changed. We’re not going back to the crazy tech boom days with silly multiples for B2B SaaS companies.
What other implications of the new game of PE acquirers do you see?
