Valuations 101
Exploring factors that impact a SaaS companies valuation
Happy Friday Founders and Friends!
We hope the bloom community is having a great end to 2021!
Before diving into this week’s newsletter, we wanted to highlight some of our top newsletters from the past few months. We have shared some great insights ranging from due diligence best practices to operational playbooks. Here are a few of our favourites:
P.S. If you are enjoying our insights make sure to subscribe 👇👇
Valuations 101 💰
As a SaaS founder and operator, whether you are preparing for an exit in the near future or further down the road, it is always important to understand what factors investors consider when evaluating SaaS businesses.
Below are a few high-level factors that impact a SaaS business’s attractiveness for an M&A acquisition:
Target Market
As a founder or operator, it is critical to understand your target market and customer base inside and out. If this is not clearly outlined to investors on initial outreach- a red flag is drawn.
The first thing potential buyers want to understand is the market that your business is addressing. What is the market size? Growth rates (CAGR)? Vertical or horizontal market? What are the tailwinds and headwinds for the industry?
Some questions potential buyers consider:
Does the leadership team have a good understanding of the product/industry/customers?
Is the customer-base sticky?
Could any competitors destroy the business?
The financial health of the business
Investors want to understand the financial health of the business and the implications of these figures. Every investor has different metrics and baselines that they look at when conducting a due diligence process.
Some of the most important metrics include; ARR Growth, Revenue Churn and Net Dollar Retention.
Check out our recent newsletter on SaaS metrics:
Some questions potential buyers consider:
Have the cashflows been steady over the past few years?
Cash investments to make in the short + long term (hires, marketing, dev, design)?
Technology health
The health and modernity of a SaaS product have a direct impact on the scalability and sustainability of the overlying business- which are two factors potential buyers look for in an acquisition.
Potential buyers will want to know about the age of the software, whether it’s on-premise or cloud-based, as well as the size and history of the development team and processes regarding R&D.
All strategic buyers and private equity firms will conduct a thorough technology due diligence process that will uncover any red flags regarding the product.
Some questions potential buyers consider:
What is the tech stack?
Is the product mission-critical or close to mission-critical?
Was product development outsourced? Is any code licensed?
Leadership Team and Culture
This is an often-overlooked factor that directly impacts the valuation of a SaaS business. Potential buyers will look to understand the business culture and future intentions of the leadership team during the due diligence process.
In most cases, strategic buyers and private equity firms would be willing to pay a higher price tag knowing they have an experienced and committed operating team that wants to help the business grow with new ownership.
Some questions potential buyers consider:
If you sold your business today, what would you do? (new venture? stay with the business and keep building?)
How many employees? How long have they been with the business? Are any team functions outsourced?
What We’re Reading and Listening To…
📚 The Super Beginner’s Guide to B2B Prospecting
📚 Preparing for an M&A Exit: A Guide for SaaS Founders
P.S. If you are enjoying our bit-sized insights make sure to subscribe 👇👇
News from the Industry: deals, deals, and more deals 💰
Buyout firm Thoma Bravo builds war chest for software companies
Mimecast to be acquired by private equity firm Permira
Onex Partners to Acquire Tes Global from Providence Equity Partners
Favorites from the Ecosystem
Investors👇…..
Founders👇…..
Operators👇….
About Bloom Equity Partners
Bloom Equity Partners is a lower mid-market software-focused private equity firm, leveraging deep operational and commercial experience to create enduring market value for the benefit of our investors, founders, and their companies.
End Note
Thanks for joining us for another edition of the weekly bloom.
We’re excited to continue backing remarkable teams on their quest of changing the way we work, live + create.
As always, if you enjoyed this week’s newsletter we'd love it if you shared it with a friend, co-founder, or anyone that would find value.