M&A Market Outlook: What Does the Future Look Like for SaaS Valuation Multiples


Watching the headlines and the dips in the stock market over the first half of the year was enough to make anyone queasy — especially if you’re a software CEO thinking about selling your company.

While the software M&A market feels the impact of some of the same macroeconomic forces that affect public companies, it’s important to consider they experience separate trajectories. And the software M&A market outlook for 2022 is still strong overall.

Software Equity Group closely monitors both markets and looks at merger and acquisition activity, historical trends, and insights from the investor community to paint a more complete picture of what’s happening.

For our latest M&A market outlook report, we conducted an analysis of available data and surveyed the top software-focused private equity investors. We found much less dramatic shifts in M&A valuations compared to the public market and an overall sense that the market for high-quality companies is just as competitive as it was last year. Here’s a closer look at the numbers and what they mean for CEOs and investors.


SaaS M&A trends: Deal activity and valuation multiples

Overall, deal volume and SaaS valuation multiples in the M&A market remain strong. Both strategic and private equity buyers continue to benefit from the broader trends of digital transformation taking place in recent years.

The second quarter of 2022 was exceptionally strong, with 580 SaaS M&A transactions — the second-highest transaction count on record, trailing only 1Q22.

SaaS M&A highlights bar chart

The broader software industry (including on-premise, internet, mobile, and SaaS deals) saw 923 M&A deals in Q2, following a record high in Q1. Private equity-driven deals accounted for 60% of all SaaS deals, a trend we’ve seen over the past year.

In our investor survey, just under half said that high-quality deal volume has either remained the same or decreased less than 10% compared to 2021.

Bar chart of SaaS companies that have been reviewed

SaaS valuation multiples also remain strong and steady.

The median SaaS M&A EV/Revenue multiple of 6.4x dropped 16.9% quarter-over-quarter but represented only a 4.5% drop year-over-year.

SEG M&A Highlights and SaaS M&A revenue multiples

Noteworthy M&A transactions in the second quarter included the acquisition of Zendesk by Permira ($10.2 billion), Datto by Kaseya ($6.2 billion), and Brightly (formerly Dude Solutions) by Siemens for $1.6 billion. Within the SaaS M&A market, we’ve also seen pockets of strength within certain industry verticals.

One example is healthcare, which made up 18.4% of vertical SaaS M&A deals in the second quarter of this year. That included the acquisitions of Change Healthcare (certain assets) by TPG Capital for $2.2 billion, MEDIFOX DAN by ResMed for $1 billion and Prescribe Wellness by Transaction Data Systems for $125 million.

SEG Partner Brad Weekes said the relative consistency in M&A deal volume and SaaS valuation multiples tells a different story compared to what’s happening in the public market.

“You go into the boardroom, and you’re making decisions based on the public market because the headlines are readily available… but the reality is, the M&A market is still healthy.”

How those trends compare to SaaS public market valuations

To stay up to date on trends in the software market, we monitor 110 publicly-traded SaaS companies called the SEG SaaS Index. We publish a quarterly analysis of this index with updates based on publicly available financial data. (For more detail, read our 2Q22 report.)

Overall, the SEG SaaS Index’s median total revenue climbed to $576 million in the second quarter of 2022, representing a 27.7% median growth rate compared to 22.5% in the second quarter of 2021. Nearly 75% of companies in the SaaS Index had revenue growth of 20% or greater, compared to just over 50% last year.

However, public SaaS company valuations declined 53% YOY to 7.1x EV/Revenue.

SEG SaaS Index and SEG SaaS index revenue multiples

It’s worth noting several factors that may have contributed to an unusually strong start to 2021. We saw a significant increase in demand for SaaS applications as company leaders realized remote work was becoming a permanent reality. Technology designed to improve collaboration, enable easier online purchasing, and pave the way for a more seamless integration between sales and operations saw similar spikes.

In the second half of 2021, macroeconomic factors including rising interest rates, inflation, and geopolitical factors combined to apply downward pressure on the public market. Investors began to reconsider riskier high-growth assets with a high burn rate.

A few things worth noting from our 2Q22 Public Market Update:

  • Public SaaS companies with profitability experienced the smallest YOY decline in EV/Revenue multiples
  • Those with a gross margin of 80% or higher saw a median multiple of 52% higher than the SaaS Index median
  • Software that contributed to digital transformation, such as communications and collaboration and DevOps and IT management, had the highest revenue growth rates but saw their multiples drop dramatically
  • Companies providing mission-critical solutions, such as ERP, supply chain and security, experienced a lower decline in SaaS valuation multiples compared to other product categories

How investors view the market now and in the future

We asked investors how they expect the M&A market outlook to change during the second half of this year.

When asked about deal volume, just over half of investors (51.6%) said they expect to see a decrease in the volume of high-quality SaaS companies. About a third believe that decrease will be 10-20% or less, while another third believe they will see an increase.

SaaS M&A deal volume

When it comes to SaaS valuations, over half of investors (54.1%) believe they will see a decrease of 20% or less, while nearly 20% believe they’ll see no change.

Bar graph of M&A valuation

It’s clear many investors still view the software market as competitive for high-quality opportunities. Our survey results indicate that companies with the right profile can still obtain strong outcomes in today’s M&A market.

“The market is so nuanced in terms of who’s getting good multiples,” Weekes said. “There are relative pockets of strength. It’s important to understand where you sit within the broader market landscape.”

How investors define high-quality companies today

Just as the economy and other factors have changed, the way investors think about companies that will command the highest SaaS valuation multiples in 2022 has changed somewhat compared to last year.

High gross profit margins and high gross revenue retention is at the top of their priority list now as they evaluate new opportunities. Gross margin has become significantly more important, with 28% of investors naming this their top priority, compared to just 1% last year.

When we consider why this has shifted, we believe that during times of greater uncertainty, the combination of high gross profit margins and high gross revenue retention indicates both growth and stability.

This is great news for companies in mission-critical industries with attractive metrics.

Because investors expect to see fewer of these companies for sale, a company that’s on the market may be more likely to command a high valuation. Our team of experienced M&A advisors can offer guidance on how to maximize your company’s valuation, determine the best time to sell, and position your company as an attractive opportunity for investors.

For more insights on the M&A market outlook for 2022 and how you can take advantage of the opportunities ahead, download our full report.

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