We were unsurprised to read reports from Deloitte and Software Equity Group pointing to continued growth in Software-as-a-Service corporate valuations.
So what's fueling this in 2019?
And when will valuations peak? Because once they have, they can only go one way...
SEG have reported a rise in revenue multiples to 4.8x Revenue: Enterprise Value in 3Q19, up from 4.3x in 3Q18 against a backdrop where SaaS transactions are expected to exceed 1,100 by the end of 2019. True, these averages are driven up by a handful of outlying deals. But as long as a subset of a vertical is being considered on a revenue rather than EBITDA multiple basis you know exceptional valuations are on the menu.
We have all seen Microsoft, Adobe & Salesforce adopt a subscription model with the consequent benefits to their valuations. They have pulled ahead of competitors because their customers love the mobility and flexibility they get from the model. And investors love the way that gross margins improve with every new subscriber added, not to mention the reliable revenue streams and low attrition rates. So they are willing to pay premiums for the expectations of predictable growth on both the top & bottom line right now.
The economics applies just as neatly to SME & Mid-Market SaaS businesses and many sellers have already taken advantage of the open window of opportunity.
So what's the outlook for 2020 and beyond? No-one can be sure. Symmetry feel confident that the window will remain open at current valuation levels next year and are looking forward to delivering for those clients who recognise that now is the time to act. But growth trends have a tendency to reverse around the time that the wider crowd catches on. We are expert at expediting the early stages of a sale preparation & execution process but wise sellers will still factor in sufficient runway in order to ensure timeframes work for and not against them.
Jonathan Tate
October 2019
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