B2B SaaS founders envision their entrepreneurial journey including a liquidity event such as an IPO, a financial acquisition, or a strategic acquisition from an industry leader.
Lowell Ricklefs has deep operating experience leading tech companies and has experienced acquisitions on both the buyer and the seller side multiple times. During these processes, Lowell often wondered why banks were required to sell a SaaS company.
Lowell identified an opportunity for enhanced sell-side assistance for SaaS companies in the $3M - $20M ARR range.
The first topic we cover is the personal decision of deciding to sell your company and the signs that suggest maybe this is the time to consider selling. One sign is the journey has been very long and arduous and the founder is tired, does not have any new breakout ideas, and is ready to exit. Another sign is when a market segment becomes very hot, the competition is fierce and larger companies have started to enter as competitors.
One threshold that Lowell suggests is critical to optimizing company value is reaching at least $5M - $10M ARR will materially increase both the interest and value that your SaaS company will receive.
A consideration that a founder needs to be fully explored is if they are truly ready to step away from being the day-to-day leader of the business. Often, especially in strategic acquisitions, the founder who has been the CEO for years will most likely be asked to take a reduced role within a larger organization. Some founders can find this very comfortable, but often it can become a struggle when the ultimate decisions will not be their own.
Strategic acquirers typically will be looking for a company with at least $10M ARR. At a macro level, Growth and Retention metrics are the most important metrics that a strategic acquirer will evaluate.
Net Revenue Retention, logo churn, revenue concentration, total addressable market, and EBITDA are important to strategic acquirers. Another metric that strategic acquirers consider is the amount of capital raised or consumed, as strategic acquirers do appreciate and value the company's ability to grow efficiently.
Our host, Ray asked Lowell the question for a $10M ARR company which is more important to an acquirer - Growth Rate or Net Dollar Retention? Lowell said both are important, but one that can grow organically as measured by Net Dollar Retention is his choice for the most important company value impacting metric...at $10M ARR and above.
An early-stage company will not be valued based upon the level of profitability by a strategic buyer, but Lowell still recommends having a plan to become EBITDA positive, and growing that profitability is a critical metric.
One consideration for strategic acquirers, especially Private Equity (PE) is if your company will become a "PLATFORM" for industry consolidation. There are several PE firms that have a thesis of consolidating the industry, growing through acquisition, and eliminating duplicate SG&A costs leading to increased profitability. In this scenario, having great organic and profitable growth is foundational to the company becoming the platform for consolidation and growth.
"PLATFORM" - what does this mean in strategic acquisition? For Private Equity - it is the company that becomes the centerpiece of a consolidation strategy. $10M ARR is really the threshold to be considered as the platform for a strategic consolidation strategy. Many PE companies also use the available market size as a criterion for using a consolidation strategy - but many also will focus primarily on Internal Rate of Return (IRR) as the primary criteria.
If you see an acquisition for your SaaS company as a potential outcome, the conversation with Lowell is a great listen!