April 9, 2021
This blog is part our recurring series “Friday’s on Recur” featuring Co-Founder of ASG Jake Brodsky, covering what’s happening in the market and common Founder questions about growing, selling and leading a SaaS business.
2020 was something no one had experienced before. The concept of 2020 has bled into 2021 and will continue to persist for another few months as vaccines continue to roll out. While some began to compare 2020 to other events that caused economic recessions in the past (1920s, 9/11, 2008), we soon learned that this would be something very different, and honestly, we’re nowhere near the finish line.
But life must go on, and one aspect of that is thinking about what selling your SaaS company might look like in this new world we’re living in. The truth of the matter is, the Mergers & Acquisition (M&A) market may have been one of the fastest to bounce back after the temporary freezing of capital in March-May. The bounce back has us looking differently than we did pre-COVID though.
The barbell effect has taken over. Pre-COVID, the median SaaS business traded for 4-6x revenue. There was still the occasional 10x revenue you’d read about somewhere, and also the 1.5-2x revenue you wouldn’t read about because the only happy party is the buyer. What we’ve seen during COVID, and accelerating as of late, is that the range of the median has widened. The median over the last 6 months has trended closer to 6-8x revenue, with the whisperings of double digit multiples sounding more like screams at high frequency. On the other side, the ceiling for “non-pristine” companies has been set below 4x revenue. The barbell that has come into play is sellers should more or less now be expecting to sell for either <4x or >6x (and potentially much greater). So why does this barbell exist and why has it become more prominent?
In one word, competition. In a phrase, there is more dry powder (uninvested capital raised by investors) in the hands of experienced and professional investors that is driving up prices for pristine assets. Leading into March 2020, there was more dry powder than ever before in the private equity industry. That cash was committed to their funds, so it’s not as if it could’ve disappeared. It was just laying in wait until we could get back to putting it to work. COVID shined a spotlight on what businesses could endure an economic recession, as many of the SaaS businesses hadn’t been around from 2008-2010. The question we always used to ask during a diligence session of “how would your company perform in a downturn” was no longer theoretical. The actual question and data supporting the mission criticality of the software was at our fingertips. Therefore, companies that demonstrated stability and growth during the downturn gave investors confidence that if that’s what the performance was during the pandemic, you can only imagine what it’s going to look like coming out of it. More companies made peoples’ “must own” list, regardless of price. So in evaluating those companies, price became more flexible as long as they owned the business at the end of the day.
So what does that mean for founders as they think about selling? Plainly put, you’re going to have to take a hard look at your business to see what side of the barbell you’re on. There will always be a buyer for SaaS businesses (in that sense, nothing has changed about the M&A market compared to pre-COVID). But you must consider what your reservation price is. If you’re on the low-end of the barbell, consider waiting until COVID is further behind in the rear-view mirror so the median ranges decide to narrow. If you’re on the high side of the barbell, consider pulling your exit forward as multiples for those types of companies have never been higher. Many will say that the high-end of the barbell won’t change, but we also said that about the housing market in 2008.
As you think about selling in this new world, be prepared to talk about your response to COVID. Did growth slow, remain consistent, decline or accelerate? What was your reaction on the cost side of the business? How is your team’s loyalty and excitement different now vs. in 2019? What happened to the competitors you used to see pre-pandemic?
The world of M&A is as strong as it has ever been, but the process for how equity groups get to the finish line may have changed for good.