SEG’s 2021 Annual SaaS Report Highlights a Flight to Quality

Software Equity Group recently published its 2021 Annual SaaS Report, complete with detailed data and insights into SaaS M&A deal activity and public stock market performance. Download the full report here: SEG 2021 Annual SaaS Report.

Of particular note, the report describes a breakout in the median SaaS M&A EV/Revenue multiple over prior trends, driven by heightened and sustained buyer demand for SaaS. On slide 31, the median EV/Revenue multiple for SaaS M&A transactions hovered between 3.8x and 4.9x over the past four years. In 4Q20, the median EV/Revenue multiple reached 5.7x, representing a 23% increase over the four-year average of 4.6x and nearly 48.7% over 4Q16’s 3.8x multiple. On an annual basis, EV/Revenue multiples nearly doubled over the past decade, growing from 3.2x EV/Revenue in 2010 to 5.7x in 2020.

The growing multiple demonstrates the high demand for SaaS assets. In 2020, strategic and private equity buyers flocked to high quality, growth assets and demonstrated a willingness to pay a premium for these assets.

It’s interesting to reflect on the viewpoints from the start of the pandemic. At the time, SEG interviewed 25 strategic buyers and 25 private equity investors to evaluate their views on the market and how the SaaS market would prevail. While nearly all buyers and investors in the survey indicated uncertainty in the markets and predicted the M&A market to be impacted, they solidified a strong preference toward low-risk SaaS offerings with contractual recurring revenue streams.

“Today, the industry has shifted to subscription pricing models with an extreme focus on protecting and building annuity streams. It is not uncommon for these recurring annuity streams to account for more than 70% of a SaaS company’s revenue. In contrast, the recurring maintenance and support (M&S) annuity stream of a perpetual license-based business would often account for approximately 30% of total revenue. Thus, M&A execution risk has been materially reduced, especially when combined with strong retention rates.”

Private equity buyers indicated the impact on M&A markets to be less severe than public markets: “The private capital markets are insulated from volatility due to five to seven-year hold periods and the ability to grow through the next downturn.”

The SEG 2021 Annual SaaS Report calls out the strength and resiliency of the SaaS model. With so much uncertainty in the markets over the past year, buyers and investors counted on software and technology companies to be comparatively insulated from risk.

Download the full report for more insights: SEG 2021 Annual SaaS Report.