Common M&A Misconception: We’re not SaaS, so buyers won’t bite

Today’s M&A market is full of companies in various sectors. With a constant flow of technological innovation, players in the tech industry will continue to be in high demand by strategic buyers and private equity firms alike. As disruptive trends continue to change the M&A landscape, one thing remains true: the right type of tech will generate heavy interest and high valuations. SaaS and traditional software and services each have their own valuation methods, but that doesn’t mean that any one of them is of more import than the others.

 

Broadly speaking, SaaS is a value accelerator, not a prerequisite. Consider the revenue streams of SaaS companies versus other business models. SaaS customers provide long-term, recurring revenue sources with high renewal rates. They also tend to nurture high gross margins with relatively low R&D expenditures. All of these factors contribute to markedly high valuations for SaaS companies, but are only a few indicators used by buyers to determine a target’s value.

 

The key to finding a great buyer is making sure there is a shared vision about why your business is valuable to them. SaaS is just one of many valuable but non-essential factors that contribute. If the SaaS business model isn’t relevant or currently prominent in your business here are some examples of other business model attributes that can boost your valuation:

 

Strong synergies between your products and the buyer’s strategic business objectives: While it’s true that buyers are reluctant to include synergies in their valuation assessment, if your business is unique in its ability to help them realize those synergies, the fact remains that your business has greater value to them. Identify what those synergies are and articulate how and why the acquisition of your business is the most effective way for them to achieve their goals versus any alternatives they could pursue.

 

Strategic product capabilities: Many of our clients feel their products are superior or that they stand alone with differentiated capabilities in their market. Buyers will be naturally skeptical of these claims regardless of their merit. So, it is vital that any product superiority assertions made are articulated clearly and convincingly with specific examples to back them up. “A better user experience” isn’t clear or convincing, but “Training users isn’t necessary due to the clarity of our UI and embedded training content within our product” is much better. Backing it up with customer testimonials and references is better yet.

 

Customer and partner relationships: Every seller should examine how existing customer and partner relationships benefit each prospective buyer they approach. Who are the target customers and partners for the buyer’s business? Are they trying to broaden their addressable market in ways that overlap with your customers or partners? Will integrating your products or services into their portfolio help them accelerate growth, achieve higher revenue per customer, enhance the strategic value of their offerings, enter new geographical markets, or increase customer retention?  

 

Revenue and growth prospects: If your business model includes contractually committed revenue, or maintenance and support, it will be viewed similarly to SaaS revenue and help boost your valuation. Also, if there is strong historical growth, healthy growth projections, or a sizable sales pipeline and you can support the numbers with sales metrics like conversion rates, buyers will take notice and expect to pay more. Nothing is more compelling than demonstrating sales growth while your business is in market, so put extra sales focus into your business to maximize your outcome.

 

Talented people with deep expertise: The most strategic asset for any software business is its people. Demonstrating the caliber, experience, and backgrounds of your team members is an easy way to boost value. Put together a team profile that shows team member qualifications, awards, related articles and news stories, and accomplishments. If buyers are serious they will want to know who your key people are and why you view them as such. Many software businesses are acquired with premium valuations based primarily on the value of their team.  

You’ve worked hard to get to where you are, so turn over every stone in presenting and positioning your company with buyers to help them understand the full value your business represents to them.  

 

If you are interested in finding out what your company is worth, contact us for a valuation.

Posted by , Vice President on 30 June 2017
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