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Unlocking Strategic SaaS Valuations

November 1, 2016

After reading our recent white paper What is My SaaS Company Worth? one of our portfolio company CEOs reached out asking about the premium a SaaS business would garner in a strategic sale vs. a re-cap or equity raise. It struck us that this may be a topic other companies might have questions about so we have addressed it here.

First off, the private company data in the white paper was predominately from strategic exits to other software vendors.  That means the private company revenue multiples referenced in the paper already capture (on average) strategic premiums garnered by the sellers. The strategic premium exists because a combined entity might have the capacity to drive incremental future cash flow through cost cutting or revenue enhancing synergies than the business could accomplish on its own.

The challenge for the selling SaaS business is to capture as much of the future synergistic value creation as possible in the form of a higher selling price.  The challenge is two-fold:

  1. The buyer has better information in estimating the actual synergies.
  2. The buyer will not “share” the synergies in the form of a higher purchase price unless forced to do so.

The information disadvantage is hard to overcome because much of it is based on the buyer’s own costs and capabilities. Nonetheless, sellers should work hard to identify and quantify as many different synergies as possible. If possible, push the seller on specific synergies and how they were quantified.

In terms of “sharing” the synergies, the buyer’s starting position is this: “Why am I paying more to you for your company because of the cost savings and cross selling I will achieve with my company’s resources?” It is a valid question, and the only reason a strategic buyer will pay more is if another strategic buyer will give you some credit for the synergies. In a competitive process, the buyers must share some of the synergies with the selling company in order to win the deal and reap any of the synergies at all.

If the buyer does their math properly, however, and does not overpay, some benefits will remain for themselves for a “win-win” acquisition.

Creating a competitive sale environment is normally important to maximize value in any transaction; however, it is particularly important if there are strategic buyers involved. The key is: there needs to be more than one strategic buyer, not just more than one buyer of any kind, to really unlock value. In the absence of more than one strategic buyer, they can simply bid just slightly above what the financial buyers are willing to pay, and capture most of the strategic value for themselves.

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