Secrets of Successful SaaS Exits: How to Get a 10x ARR Multiple

my name is okan alai I head up the SAS franchise at comcap uh we are a global technology focused Investment Bank focused on m&a and growth fundraising activities both on sell side as well as buy side um over the next 20 minutes I'll give you insights from the Strategic discussions we are having both with found ERS and and entrepreneurs

like yourselves on m&a and fundraising activities as well as with the buyers and investors on how to dictate valuation um so I hope that you know you find take some insightful insights um before we dive in a little bit background on myself I've been doing technology focused investment banking for the past 10 plus years uh here are some kind of software clients that I've advised uh in in notable ones uh more

recently kwu which was a HR software player we helped them sell to Iris Software um clear was an influencer um management software company helped them sell to meltwater as you can see from the flags of our clients um of my clients um you know we have expertise with uh crossborder transactions whether a client in the US looking for a buy side advisory globally or looking to

raise capital from anywhere in the world um little snapshot on the m&a markets um we see still a healthy level of m&a activity happening both by uh the gray boxes here highlight the Strategic deals and the orange ones are the uh private equity and Venture Capital deals as you can see private Equity holds up about a decent chunk of the the deal

activity alongside of strategics um and that's a very uh important and interesting uh type of a player that I advise you to get a little bit more educated on and I have slides on the general private Equity Playbook and the types of deals that they uh put forwards because they can get to really competitive valuations unlike a common uh thinking would be you know I'm going to maximize value if I only deal with strategic

players at comcap um we track publicly listed companies across different software verticals so we have an index of say you know north of 70 companies in our index and when we cohort them for the ones that are growing north north of 20% and as a publicly traded company obviously that's really difficult um medium growth what where we position as 5 to 20% and low growth less than 5%

this is how the revenue multiples look like over the last five years and as you know one might think the high growth ones are trading at a premium than the low growth ones but what's really interested interesting here is um unlike the common belief of today's valuations being significantly lower than what it was a couple years ago if you look at the low growth for example cohort they're today trading at around 3.8x multiple last 5e average is 4X so it's

really close to where it was yes the the initial statement is true for the high growth one on you know they're trading today at around aex but if you did the average which the orange line here is not telling the right story because it's kind of factoring in the prior to 2021 that average would be much higher so how does one potential strategic or an investor determine value they look at rule of 40 this is a really

good indicator um so what you see on this chart is the revenue growth rates combined with the iida margins and on the xaxis you see where that LS from 10% all the way to 90% um and what the correlating revenue multiple is in our Sal index about 10% of the public companies fall less than 20% on the rule of 40 about majority of

them about 80% fall in between 20 to 60% and then the outliers outperformers are North of 60 and as you can see uh let me see if this works Works yes you know the underperformers trade about 4X the middle group trades somewhere from 5 7x and then you know you start seeing double digit ARR multiples on those that are overperforming on the rule of 40 um that has been kind of the Northstar one

metric if you ask me like how a potential buyer will value my business I would point you towards a rule of 40 chart um these are those types of different partners you should be thinking about I'm not necessarily suggesting one over other they you know you should be factoring in different things a strategic player can definitely pay you a lot higher valuation up front but you know they're requiring good culture fit the integration would be

full and it's important post deal acquisition you can potentially leave sooner than if you were to do a deal with a private Equity Firm um and the future value generation is limited to earning out uh structures as opposed to if you were to do do a deal with a private Equity Firm you know you might benefit from the second bite of the Apple which means they ask you to roll some Equity into the new entity um and they would work with

you to make some tuck in Acquisitions roll up Acquisitions so that that Equity that you roll can continue growing and typical private Equity time frames are say on the low end five years to 10 15 years at that second exit you can also make um a lot of proceeds and then there is always the private Equity back strategics which who you might want to join their Journey they might be into that like two three four year of that platform investment and they can acquire

you to tuck you into that platform so that you would have an exit much sooner than U 5 10 years um you know Nathan asked me to Think Through kind of what factors Drive valuation up in these type of discussions and there's no single one metric I pointed to rule of 40 earlier but here are some that uh typically the buyers are looking for kind of the ARR scale if you are say at around 10

million AR or plus your options definitely widen up private Equity start showing a lot more interest from a platform investment point of view and there is definitely a scale premium to those that are say north of 20 30 million of AR growth rate uh is it stand Standalone you know it is an important metric when you combine that with profitability it's a lot more important um retention of your clients buyers today same with

investors are extremely sophisticated in understanding the unit economics and the driving forces of your business so what we like to do there and I have a couple slides about this um is to look at your core ICP and not just look at your sess metrics as a company as a whole that's important but you need to better understand kind of how do you define your core ICP what the underlying metrics for that is so that you can position your business

accordingly typically you know because of the Cross sell upsell opportunities Enterprise customer base is at a higher valuation Point than kind of if you're purely focusing on SMB what I've seen in my career is for those clients that have high concentration of SMB clients if they can demonstrate one or two Enterprise wins buyers would still take give a lot of credit for that and they would believe that you know you can continue building upon that so you don't

necessarily have to have a high high percentage of your customer base as Enterprise customer concentration that's one that sometimes makes the difference of killing a deal or getting a deal done because um you know if you have high concentration towards one client or say couple clients or a specific sector and in your process of say 6 9 12 months of running an m&a process if you lose one of those key customers or if that sector

is facing some headwinds that can significantly impact the outcome of the transaction and the valuations that you might get um and then growth Avenues I mean this this is one that I really enjoy having conversations with Founders I I think it's always wise to start thinking about what are some tangental verticals to my business that if I had all the money in the world I would go acquire combine and what we can accomplish together and how can we win

against our competition because that story resonates really well with the private Equity firms they're always looking for those thoughtful CEOs funders who have a vision not just you know organically but also inorganically and they're ready to pull push a lot of cash uh and you know throw gas into the fire and help you get there faster which is kind of the private equity Playbook that I'm illustrating here you know the they would acquire you as a platform or you can be the tuck in

acquisition for that platform um say that you know you're a 12 millionaire R they would help you make these Acquisitions relatively quickly a private Equity Firm can you know do multiple deals in six months uh or they can even pursue much aggressive acquisition strategies to get you from say 12 million this is just illustrative say 10 million of AR to 30 million ARR in less than 12 months that are basically come with the scale premium Etc that you can then sell to a

consolidator you can pursue IPOs if you're like 2 million 200 million or above um so there is no bad timing of starting to think about kind of who are those relevant tangental targets would be and building those relationship and that's why I think SAS open is a great uh environment for you all to meet other fellow CEOs and Founders so how do we drive premium

pricing um you know it doesn't always come from the bankers yes you know we do our best in terms of um you know strategic positioning the business with the relationships we have preparing you for diligence so that there's no blind spots last minute after an Loi you just realize kind of maybe the IP wasn't done correctly with the legals or the taxation rules wen't correctly followed in the US what have you can delay or significantly impact the outcome of the

trans action but the business needs to also perform and you know when we start working with our clients the number one advice that I give is to you need to focus heads down on your business because hitting your budget the business momentum is as important as having the negotiation discussions with potential parties and um because if if potential parties see weakness and softness during the process that kind of typically

Spooks them and that's why timing a process is very important you don't want to be too late you don't want to be too early you want to time it just right so that when you're having those discussions the business is also month over month kind of continuing to track um calculating sess metrics is really important we were having dinner two days ago with Benchmark it and the Cs CFO you know having those um sess metric package

ready internally and you update it month over month so that you're ready to react to those discussions um is very very important and you know one might think valuations are driven by kind of we've looked at the public coms you know we analyze m&a markets and comparable companies to you and look at the revenue multiples there yes that's very important SS scorecard kind of what we looked at earlier all those different

factors it's important but what where you reach the highest multip is normally and typically bu the Synergy upside case and you know we would work with you together to define those synergies by different buyer categories and partner categories and formulate to them so that their Corp teams or the CFOs cosos can really digest and understand if they were to acquire you today say for you know 8X what type of

additional Enterprise Value they will drive post deal cross sell upsell into their customer

base so um you know one question that typically when we start sitting uh with Founders is to strategically plan a process is to you know do we wait to become reactive when we do receive an offer or should we go proactive and start reaching out to say you know 30 40 parties and you know uh proactively mention that we are looking to accomplish a deal um and you know what

I've seen in my career that works best is you know neither of these two approaches obviously it's great if you have inbound interest and if the valuation is right and you know you can exclusively choose to negotiate with them or you can ask like a banker like us to you know do a targeted small Outreach to see if you can increase the ex existing offer on the table but what's typically giving you the highest valuation is to do run a what I call a

two-phased process where you break an m&a process into two hubs the first top is pre-marketing you work with your Banker to prepare your sess metrics you understand your business you you don't leave any blind spots for diligence um you really identify the highly strategic parties and the private Equity firms out there and you start highlight you know increasing the presence of your business among those key decision makers without looking for

a deal today that typically leads to you know either a strategic or a private Equity preempting something expressing interest or even if it doesn't you know say six to 12 months from then you're ready when you turn the knob on a proactive process you have a built book of interested parties who are up to speed on your business so it doesn't let you uh leave anyone behind because once you start you know a proactive process

there will be definitely some parties who cannot participate because they have either they're doing another deal at that time and their hands are tied maybe their um public markets are little might be affecting their valuations Etc so um you know this is another question that we get asked commonly is you know how to best how to pick the best time to launch a process um you want to look at ex external environments

there's typically some signs of consolidation happening in certain spaces and you want to be kind of not maybe the first one that's leading a consolidation but you definitely don't want to be the last one either so you want to be following the market activity market trends that's happening in your sector and maybe tangental sectors so that the buyers and investors are always keeping you top of mind when they're looking for uh acquisition ideas um and then also you know look for the

regulatory CH changes uh any external risk factors that might today or in the near midterm might impact your business uh because you want to proactively start thinking about okay is this the right time to sell or transact you know business performance we we touched upon this earlier um you know it is really important while having these type of strategic discussions for your business to continue performing at

least not declining because that does significantly impact the outcome you know and prepare a data room I mean um that's number one advice that I can provide to any entrepreneur is you never know when there will be an inbound interest coming to you and you want to be ready with a thoughtful data room that's prepared that's commonly getting updated no mistakes and that you can stay behind of and have to share with you kind of or template um if you reach

out to me about it um establishing a book of interest you know there are companies that I meet that I meet with that are doing north of 2030 million R and you know they've never spent time to really meet with any private Equity firms or any strategic players in their space so when we start mentioning them to those parties that's the first time they hear about obviously they read them about in the news but there should be existing dialogue in my view between the

SE um as you're having that that Journey so that you can also identify the culture of it you know uh some of the Strategic deals do require um earnout Integra integration and then earnout element and for you to be able to maximize or achieve those earn outs it's important that there's a cultural fit between the firms common pitfalls uh we broke that into two halves these are more SAS

specific pitfalls that we have seen um in running these deals um these are more kind of General I guess you know number one is being being overly aggressive in your forecasts because yes you want to you know be aggressive enough that it's appealing to the potential partners that you continue your trajectory but at the same time it needs to be reasonable and realistic because they will hold you accountable for those numbers and last thing you want is to you know promise

like a 20% growth uh for next year where you actually are going to only receive 5% and they put a valuation with an earnout structure assuming that you're going to hit that you would be leaving a lot of money on the table if that's the case uh so any material or any financials kpis that you present today you'll be held accountable throughout the process and after so that's something to keep in mind and that's an area where we have a lot of discussions with Founders because they always want

to project the numbers at a you know more aggressive rate than what we believe the historical Trends would dictate um underestimating the preparation time um often times I guess ask can we hit the market like next month can we go super fast there is some time for kind of the banker to get up to speed enough to understand your underlying kpis and prepare yes things can move quickly and we can adapt to that but ideally you want to leave enough time for Preparation maybe a

couple months for kind of your entire team and your executive team as well the CFO is the number one person that needs to be brought Under the Tent and you know help us during the process and then and maintaining customer relationships you know again um for a Founder it's really important to throughout a process or m&a or fundraising to be very sharply focused on the business and continue running it

um as they would normally and not get too distracted by the process going on and that's the advantage of having a banker on the side is that we can take all that kind of um administrative and other work from you and so that you can focus on your business because losing a customer or getting a bad reference check from a customer throughout an m&a discussion can get the deal off the table well uh that's the end of my

presentation I may run this later afternoon if you have any questions Havey to chat privately or as a group um thanks for listening to me