4 SaaS Metrics That Have Driven Over $50bn in Acquisitions

um hey everyone um so today I'm going to talk about four metrics that have driven over $50 billion do in Acquisitions so over the next 20 20 minutes I'm going to show you things I've seen over $50 billion dollars of closed m&a deals with data first so this is real data from Real Deals that we've seen metrics that don't matter in every business you have to track lots of

different metrics as CEOs Founders you're probably tracking lots of different things but from what we've seen there are four that really matter the most common myths confirmation bias and other things you might hear that sound like they might be important to Acquisitions but actually aren't when you really look at the data uh and then I'm going to go a little bit into like a real deal show you some like snapshots from a deal how buyers think what the market is like right now and then reality versus is

Theory so just for a little bit of context before we get into like the meat of it um over the last 15 years uh Fe International which is the firm I'm CEO of founded 15 years ago we've completed over 1500 transactions every single time we close a deal we track all of the data so we track lots of data we know it's important we know what's not but there's a lot of data that goes into everything I'm going to be talking about today say

it's not my opinion it's purely what the data shows so four important metrics that matter and effect valuation number one is net dollar attention there's clear correlation as you can see from the graph between the revenue multiple or your Enterprise Value essentially and your net dollar retention the higher the rate is the higher your valuation will be I think for the purpose of the presentation you could probably ignore the scale

so doesn't necessarily mean if you have a say 130% not net dollar retention your business will sell for a 15 times Revenue multiple it's more the better your net dollar retention is the higher your multiple will be compared to another similar business so as you're building a company and you're thinking about your metrics on a day-to-day basis there's very clear correlation between your net dollar retention and your overall

valuation number two is is your annual revenue growth rate buyers want to ultimately and this is what all of our data shows buyers want to acquire companies that are growing and they want to acquire C companies that are growing consistently what and I think where the data is particularly interesting here is you do not need to be growing at 200% year on year I think particularly when you come to an event like SAS open it's essentially full of successful Founders

successful business owners every single talk has a title which has like a clickbait element of how I quadrupled my business or some exceptional sounding either exits or results outcomes metrics that you can't necessarily replicate in your business but what the data shows is that company's growing at least 40% year on year and in my experience in most businesses 40% is a realistic growth

rate you can aim for and you can achieve will sell for a higher multiple than a business business that's growing at less than 20% and I think the interesting thing here is when we looked at the data when we saw companies growing at say 80% or 100% there was not necessarily A disproportionate increase in multiple so once you get to 40% growth rate you will be at the higher end of Premium valuations um I think one of the ways to

think about that is buyers will often perceive 40% to be a sustainable growth rate when compared with all the other metrics if you grow 200% in the year there might have been a particular oneoff so for example like during covid a lot of businesses significantly grew that's not necessarily sustainable and buyers will not necessarily value it when it comes to your multiple whereas 40% consistently definitely does very clear correlation with

valuation number two is sales efficiency you can also view that there's lots of different ways you can call this lots of different textbook definitions but essentially this is how effectively you are turning spend on sales into Dollars generated so companies that are more efficiently turning dollars spent on sales people into Revenue sell for higher multiples this is particularly interesting data in

2024 if you go back to 2021 buyers did not care as much about how efficient you were with your sales spend and there's actually interestingly if we in interchange sales or marketing spend you get pretty similar results and I think if you see someone like Wes Bush who's speaking here he talks all about product Le Marketing in that case marketing is and your marketing spend is a relevant metric if you have a sales team your sales spend is a relevant metric the reason this is particularly

important in 2024 is buyers care about your profitability and they care about the sustainability of that growth and if you have sales people or you're spending on sales and that's generating Revenue efficiently then that's much better than three years ago where you could essentially spend whatever you wanted you could lose money and as long as you were generating revenue and growing no one really cared so this is an interesting metric if you quizzed me privately and you said Thomas what is a

metric that affects valuation this would not have been in my top four so when we looked at the data this is what it shows and I think it's interesting because a lot of people would not even think about this metric day to today but as you're building your s sales team it's clear correlation with efficiency of sales spend and your outcome when it comes to a an exit and the fourth most important metric when it comes to valuation and for clarity these four are not weighted

in any order all four are important is the rule of 40 and this again is another one that if you ask me privately Thomas does rule of 40 matter I probably would have said I don't think there's much correlation between rule of 40 and valuation um but a lot of people would tell you there is and interestingly when we looked at the data very clear correlation between whether or not a company is meeting the rule of 40 and for Simplicity sake rule of 40 is your

Revenue growth rate plus your ebit doll margin if that exceeds 40 so that could be 10% Revenue growth 30% margin 35% margin 5% growth either way it's fine there's no correlation between the the two if that exceeds 40% those businesses are selling for higher multiples for many of you in the room you would have picked up on the fact this is correlated with Revenue growth rate which is metric number two but the important thing to add in here is that's

stacked with ebit DAR margin again if you go back three years ago this was not necessarily that important as long as you were growing consistently buers did not necessarily care about your profitability but today a combination of the two is important and it is very clear correlation between the two if we went back in time this would be less so people cared more about growth rate and less about margins but it's an interesting one and again if you quiz me

privately I did not know until we looked at the data how much correlation this would this would have so now let's talk a little bit about what doesn't matter because I think it's equally important to know what's not important as what is important because as CEOs as Founders you have hundreds and thousands of metrics you're probably tracking absolutely fine to track lots of different metrics but it's important to get an understanding of what doesn't matter when it comes to valuation and that should not be conceived with or

misconceived with does not matter in your business there are lots of metrics that can matter in your business important to track important to improve important to think about just does not necessarily mean they affect valuation so I'm going to go into some common myths confirmation bias and I think things like confirmation bias are particularly important at events like SAS open where people like Nathan will only put the best people in the industry

on stage with interesting stories the average person is not the average person speaking at SAS open that's not reflective of the average business so it's very easy to hear single success stories and apply that to everything and think if I do this I'm going to get the same out outcome that is not necessarily what the data shows and across the 1500 deals we've worked on there's so many different data points in there it's

really important to ignore one-offs and look at the average and then small nuances there's lots of things that don't really matter you should track them but it doesn't really matter when it comes to an acquisition so number one and I think um this one is particularly important a lot of Founders think there is correlation between how much they work and what their business is worth particularly I'd say particularly smaller business owners

believe that a someone acquiring their business cares ultimately all a buyer cares about is how good your business is the output you are getting if you are working one hour a week and your business is hitting all of the kind of the top end of the four metrics we just went through your business is going to sell for more than the person sleeping at their desk working 100 hours a week who's not hitting those metrics so if you're thinking about selling a business and selling and like how valuation works

it really doesn't matter what you're doing just matters what the output is and again this is an important one because I think in your business it's really important for Founders to work hard I personally do not think there's any replacement for hard work putting in the hours particularly early in your business it's something that's unavoidable but it does not affect valuation you probably need to do it in order to hit all of the metrics we're talking about but by itself it's not necessarily correlated and ultimately

when it comes to buying a business someone is giving you real money probably from investors or a bank or their own money they don't care how much you've worked they just care about your numbers interesting one not correlated at all you'll see with uh net revenue retention which is very similar is customer turn what we've seeing across our deals is actually very little and as you can see essentially no correlation between your customer churn and your valuation uh I think the main reason for

that is in a lot of businesses you can have a low price point cohort which turns at a very high rate and that doesn't really matter if your higher price cohorts are uh being retained in the business at a higher rate or they're expanding their revenue over time and I think if you look at a lot of public SAS companies when they talk about about their metrics and they talk about their retention metrics they will often have

the caveat or the small print that it doesn't include the lower cohort price packages so it might say oh it excludes the small business plan or something like that so a lot of public companies will intentionally avoid including their lower end price plans in their turn calculation because you end up with data like this which shows you that in many many businesses your lowest price plan your free price plan can actually have no effect effect whatsoever it's not correlated with the behavior of your

higher price users so I think the way to think about this and if you correlate it with the first slide net revenue retention is in your business it doesn't matter the number of customers are leaving it matters how much revenue you are retaining and they are two quite different things particularly if you have a product with multiple price points and the ability to spend more over time buy other products expand your Revenue so as you're building focus more

on the revenue you're generating not the absolute number of people leaving and it's a very important differentiation I'm going to talk a little bit about from a a real deal just to give you an idea of what buyers actually talk about what they actually want and I I was looking through of the 1500 deals I looked at a very recent letter of intent from a deal and I think it will quite clearly show you how some of the metrics we spoke about in the

first section were actually really relevant and became part of a deal so I literally took a screenshot on essentially copy and pasted this from an Loi uh that got signed about two weeks ago um this is a $25 million transaction which for us is approximately typical we work on smaller businesses we work on larger 25 million is quite standard uh there was $18 million cash up front so the majority of the transaction was paid

in cash 4 million tied to reps and warranties which is in really simple terms just ensuring you're not misrepresenting the business and then 3 million tied to revenue churn rate which is essentially exactly same as net revenue retention basically interchangeable $3 million tied to net revenue retention um remaining below 2% so in this case it's correlated with valuation and often it's also correlated with the

terms buyers will care about that those metrics and they will often include it as part of their offer to make sure that a what you state is true if you say you have 2% monthly Revenue turn you need to make sure that number is two not 2.5 because it will matter if you get a clause like this and these are the kind of things that will get negotiated if this said for example customer churn as advisers we would kick that out of the Lo and we should say you should not sign

that agreement because customer turn has no correlation with the success of the business per our data um so this is a real example from a real deal you'll often hear about people maybe talking on stage about why customer turn does matter but at least from valuation perspective all of our data we don't have anything to show that that's actually true terms of the market as a whole as you think about building a business a

lot of people think about timing like when should you sell um what one thing that we know is true is there is always demand for acquiring businesses the second half of 2024 at least from our internal data is looking like it's going to be busier than any period in 2021 we have more mandates more deals happening than ever before whereas a lot of people still think we're in a slump it's bad time to be selling part part of what's

driving this is the dry powder in the industry again in simple terms this is all in trillions dry powder is priv acity firms how much cash do they have to spend there's over $2 trillion and there has been for the last 6 years this graph is essentially been I have 20 years of data continuously increasing for a very long time private Equity firms have cash to deploy they want to buy businesses they particularly care about the four metrics we spoke about at

the start does not mean if you do not hit all four of those or your four metrics we spoke about do not make you unsellable but clear Cor between valuation and how much of that 2.6 trillion you can get and then I think the other thing that's important about just a pure scale and this is not all the deals that happen in the market this is literally just cash available with us private Equity firms we're an international firm we work with Buyers all over the world the important thing

to think about here is if every single person in this room sold your business for $1 billion tomorrow and then I came back and made the same presentation on on Monday and I adjusted the graph we wouldn't even see a change in like the number of pixels from the the amount of cash that's out there available so everybody can win yes you're going to hear like stories of like one-offs and like scenarios that probably won't happen to you but there's a vast amount of capital out there everyone could be

successful and the way I look at it my kind of philosophy is as that capital is deployed if each of you sold your business tomorrow for a billion dollars what are you going to do with your money you don't contrary to put public of Lea you don't go spend it and live on a beach what you'll probably do it is reinvest back and 990 million is going to come back into investing in businesses so you then end up with even more dry powder more money successful people investing their money creates

more success is a self-fulfilling cycle of More Money More for everybody and that's really what we're seeing is most people we work with who exit they don't necessarily go start another business but they definitely invest their money back into the industry they might be I don't know LPS in founder path or whoever it might might be people reinvest their money back uh and this number I think if we come back in five years time will be higher than it is right

now and then one thing I think I see a lot as an advisor and I think is important this is just one email I got a couple of months ago and I thought it was like a an in interesting one to screenshot here is lots of people will and this is all about confirmation bias they will speak to one buyer or they'll bump in someone on the corridor they'll watch a talk they'll watch a YouTube video read a book read something in Tech Crunch and they will hear a anecdote like this thing is important X metric is

important it may well have been to that person but in a lot of deals it really doesn't matter and it's important in your business to focus if you ever want to sell it and not think about things that one person has told you so this case is I've removed the client's name for a bit of anonymity uh spoke to this client they live in San Diego company they're about 7.5 million AR again a relatively typical size for

us um they had a individual conversation with one buyer who said they don't want to buy their business because the team is not remote and to that particular buyer yes that was important they had no interest in buying a business with a team in San Diego but going back to myths and factors that do not have any correlation with valuation we see literally zero correlation between valuation and whether or not you have a team in an

office or not I personally have all of my team in office we're all in the office four days a week uh New York Mumbai with multiple offices around the world I like that model many of my competitors would swear by the remote model it really doesn't matter do what's best for your business does not affect evaluation just because one person told you something does not necessarily mean it it's true so wrapping up just going through what we've spoken about four metrics

that matter multiple metrics that do not matter focus on those metrics if you're optimizing for a future exit if you are not You' probably not be in this room in the first place but don't you don't need to think about them um I would personally suggest making at least one of those metric a KP internally for your CEO dashboard or your founder dashboard have at least one of those as a metric you care about and you think about on a day-to-day basis for the metrics that

don't matter you can absolutely track them absolutely think about them have people accountable for them just be aware that they don't necessarily affect your valuation for example customer churn I definitely think is important to track because you don't want a business where customers are leaving having a bad experience and doing things like leaving a bad review so yes that doesn't affect valuation as such but there are KnockOn effects of people leaving at a high rate so still think about them it just won't

necessarily affect your valuation and I've showed you like a l and like real metrics actual deals are done based on this data a little bit about where the market is right now and then we looked at an email from a client who got some bad advice essentially from a buyer trying to do a private deal uh I think I'm pretty much out of time so if anyone has any questions I'll hang around outside and my team have uh we have a boo down the the far end happy to answer any questions um if

you are interested in a free valuation for your business happy to help anyone at SAS open uh just scan the form and in the comment section if you wrote you saw me speak or just mention my name the team will know that you saw me here um thanks so much for the time hope you enjoy the rest of the event