Knowing when to sell is always a challenge – since the timing of launching a process is not only critical to it being successful but also can make a significant difference to the valuation. One important consideration is knowing what buyers look for in a deal so founders can maximize their price and make the exit a win for them, the team and their shareholders.
Basic Buyer Behaviors
Let’s start by taking a look at how buyers value companies at different stages:
- In the early stages, buyers will typically value companies using revenue multiples (usually looking at it from a build vs. buy)
- In the mid stages, buyers will usually value companies using revenue and EBITDA multiples
- Finally, in the late stages (slower growth), buyers will value companies using EBITDA, P/E, and FCF multiples
For most SaaS and software businesses, there are a number of metrics buyers typically look at that can impact valuations significantly. These include revenue, revenue growth, recurring revenue, EBITDA margins, churn, etc.
It’s equally important to keep in mind that different industries are valued differently by buyers. For example, software companies are valued using revenue multiples (but usually need to have positive EBITDA to command a premium value). Hardware, Telco, and Semiconductors are valued using EBITDA multiples. And IT Services are valued using EBITDA multiples.
We took a look at the revenue and EBITDA M&A multiples by sub-sector to show you the median multiples you can expect depending on the sector you operate in:
The multiples you’re currently seeing are fairly positive relative to previous years, primarily due to a couple of drivers: a strong US economy, lower corporate taxes in the US, low cost of debt, and high public valuations (to name a few).
Macroeconomic factors play a significant role in the multiples companies get ascribed and how successful the M&A process will be. If you take a look at the chart below, you’ll see that M&A activity for the software space is extremely strong – 2018 is expected to be one of the biggest years in recent history in terms of # of transactions.
Driving Buyer Appetite
In any M&A market, founders should consider the following implications, as they will all drive overall appetite from buyers:
- The Market: access to capital (interest rates), cash on balance sheets, relative equity valuations, macro trends
- The Industry: other consolidation (don’t want to be the last one at the dance), industry growth trends, competitive environment
- The company: assessment of stage in the lifecycle (growth, margins), technology development vs competitors/industry, points of differentiation versus others in the market
Prepping for Your M&A
Making sure that things on the outside are right for M&A is important, but also making sure your house is in order internally is equally critical. Especially since a potential buyer can approach at any time.
Keep the following things in mind when planning to prep for your M&A process:
- Financial Information: audited or reviewed financials, internal management reporting, financial projections, more detailed financial data (by product/service, customer concentration), Key Performance Indicators or KPIs over a longer period of time, pipeline metrics (pipeline by stage, typical conversion rates, etc)
- Strategy/Story: where next? Crafting the story is critical to show future growth prospects. This can usually be achieved through strategic planning and budgeting documentation
- Due Diligence: buyers ask for a significant amount of information on the companies they acquire. So being organized around customer contracts, vendor contracts, incorporation, and minute books is very important.
When it comes to organizing and sharing important business documentation, virtual data rooms offer both scalability and security, allowing businesses to track and maintain essential business documents. The decision between using a VDR or other cloud-based solutions ultimately depends on your companies needs. When it comes to preparing for the M&A process, choosing a VDR solution not only provides high-level security, but can help your company achieve better results during fundraising rounds, investment cycles, and the management of other investment opportunities.
Ed Bryant is the President and CEO of Sampford Advisors, a boutique investment bank focused exclusively on advising clients in the technology sector on Mergers and Acquisitions (M&A).