What Does a Win Look like for You? Taking a Closer Look at Exit Multiples for Typical Software & SaaS Businesses
If you’re in the software & SaaS space, then you’ve probably seen Microsoft’s $7.5 billion acquisition of Github – a great example of how valuations can get amplified in specific situations. Github was acquired for close to 30x annual recurring revenue, while LinkedIn was previously acquired for 7.2x revenue in 2016 (and even that transaction at the time was considered to be one of the biggest tech deals).
With that said, the majority of companies don’t get ascribed these elevated multiples. In fact, out of all the software M&A deals that happened between 2010-2018 across North America, 73% of the companies received revenue multiples in the ranges of 0-5x (check out the chart below for more details). Only a handful of companies see multiples of 10x +.
And now you’re probably wondering why that is.
Buyers look at a number of things when assessing a deal and their motivation for buying can be financial, strategic, or both. From a financial perspective, buyers will want to look at things like revenues, revenue growth, % of recurring revenue, EBITDA margin, market size, etc. – it’s really about the company’s performance and ability to continue growing.
From a strategic lens, the buyer is more concerned with how the company’s product/service and their position in the market can help or hurt their competitors.
“This distinction is at the heart of why a company with five people and no revenue can sell for a billion dollars, while a company with 500 people and $100 million in revenue can sell for a fraction of that amount. Although the most well-known Silicon Valley success stories, such as Apple, Facebook, and Google, are hugely profitable examples of financial value, the vast majority of startup success stories are not about building a company capable of an IPO and continued growth as a public company (an extraordinarily difficult feat); they’re about building something of value for someone else.” (Harvard Business Review).
So, in the case of Github – Microsoft paid an astronomical premium not because of Github’s financial value, but rather its ability to access the developers who use Github’s code repository products and guide them into Microsoft’s developer environment. That’s where the real value lies for Microsoft.
We also did a deep dive on what those exit multiples looked like for 2018, and the data is still consistent with what was presented to you previously – most companies (65%) which exited in 2018, received a multiple between 0-5x. Not 30x.
When you read about deals with these elevated valuations, we want you to keep this in mind:
1. Those transactions are usually performed by larger companies (like Microsoft, SAP, etc.) – companies who have deep pockets, are gigantic and growing revenues to the point where it’s extremely difficult to grow organically anymore. So, they essentially spend cash to buy revenue (from other companies).
2. Companies like Github who are ascribed high multiples like “30x” are often larger and in extension more successful than mid-market companies – and this will make them more strategically appealing, resulting in a higher multiple.
So, if you’re a founder of a mid-market software / SaaS business and reading this article – below is a chart that can be used as reference to see what exit multiple you can expect relative to what your company is making in revenues. For example, the median exit multiple for software & SaaS companies making less than $10m in revenues is 2.7x (for 2018 YTD).
Source: S&P Capital IQ (Software & SaaS Companies across Canada & US)