"Current multiples are not in our favor"

This is a phrase I hear quite often from SaaS founders I approach regarding M&A. They are generally open to an exit, but think the timing is poor due to the current market situation.

A fallacy - from my experience, it's rarely the market if the company isn't valued at a decent multiple.

Let’s first take a look at the public market. It is a good place to start as market movements are sooner or later reflected (at some discount) in the private market. As you can see in the chart below, multiples of cloud companies have been fairly stable in recent years, except for 2020/2021 (Source: BVP Cloud Index).

Zooming out, we see that the top companies have benefited the most from the hype, while the median line does not really show a strong deviation.

Top companies are primarily characterized by higher growth. Although capital efficiency became a more important factor, revenue growth was and still is the biggest valuation driver (Source: Clouded Judgement).

Research from SaaS Capital states that in 2020/2021, the public-to-private valuation discount has increased from its relatively stable pre-pandemic level of 28% to around 50% in 2020/2021. This discount is expected to slowly settle back in the 25-35% range.

In the private market, multiples started to rise in Q4/2020 - with a lag of about a year to the public market - and started to fall again in Q2/2022. Excluding this period, EV/TTM multiples have been hovering at ~4.5-5.5x, according to Software Equity Group's latest publication on SaaS M&A.*

M&A transaction volume in the private SaaS market remains high - and it appears that smaller companies are now increasingly being acquired. So contrary to belief, it might even be a good time to sell.

Conclusion

Some founders have been fortunate in recent years to sell their companies at a significant premium. However, since it is unlikely that we will see such steep multiples again in the foreseeable future, founders / business owners should base their exit considerations less on market multiples.

More on the right time to sell and factors influencing valuation to come. ✌️

_{*It plays a minor role in this consideration, but please note that the public market multiples are forward revenue multiples, while the private market figures are reported as TTM (trailing 12mo) revenue multiples. Thus, they are not directly comparable.}