3 Factors Driving Volume & Valuations in SaaS M&A Market


Public market volatility, inflation at a 40-year peak, perceptions of lower valuations, and the looming possibility of a recession. With all the uncertainty, it would typically be prudent to delay selling your SaaS company until the macroeconomic waters become less choppy. After all, if you don’t need to sell now, why would you? Despite YOY drops in public market EV/Revenue multiples, there are still a wealth of opportunities for SaaS companies in today’s market. In fact, your company may be more attractive than in recent years due to factors unique to today’s economic climate.


The Current SaaS M&A Environment

There’s no doubt that publicly traded SaaS companies have taken a hit this year, with giants like Zoom having to reevaluate their forecasted annual revenue due to plummeting sales. While the private market has seen some decline, the drop in SaaS M&A valuations is less than what the public market is experiencing. According to our research, the median SaaS M&A EV/Revenue multiple decreased by 35% YOY in 3Q22, compared to a drop of 61% YOY of publicly traded SaaS companies. Companies that are mission-critical, however, have seen little to no decline in valuations. Despite the market’s volatility, deal volume remains strong and active. In 3Q22, there were 492 SaaS M&A transactions, virtually mirroring 3Q21. Total SaaS M&A activity grew 35% YOY as well.

“The software M&A market is hot right now because there are fewer great options for investors,” says Kris Beible, Managing Director at SEG. “Private equity investors must use their funds or give the money back. Strategics need to find solutions that help them advance into the digital era. For software businesses with the right profile, we are seeing more Letters of Intent on each deal, nearly doubling over 2021 numbers and 3x over 2020. This is great for sellers.”

What Makes the SaaS M&A Markets Competitive?

Deal volume in the private SaaS market remains high. Nearly 55% of investors who responded to our survey indicated that they believed the market was as competitive for high-quality software companies in 2022 as it was in 2021. In an era defined by soaring interest rates and a potential recession, buyers and investors are favoring companies that are recession resistant or provide mission-critical offerings. Security, Enterprise Resource Planning (ERP), and Supply Chain Management software providers are a few examples of companies that fit this profile, but there are many more like these that hold buyer and investor interest.


SaaS companies with a vertical market focus made up around 42% of all deals in 3Q22, with Healthcare, Financial services, and Real Estate leading in terms of volume. We expect valuations to continue to favor these types of companies as their customers are less likely to churn during an economic downturn.

What is causing the high level of activity in the private SaaS marketplace? The following three factors are driving deal volume and high valuations for companies with the right profile.

Factor 1: A Record Amount of Capital

According to Broadridge, private equity firms have approximately $1.6 trillion of dry powder funds that need to be put to work. These firms have deemed SaaS companies a preferred asset class; in 3Q22, they accounted for 58% of all SaaS M&A activity. Buyers and investors continue to have a notable appetite for companies that demonstrate profitable growth, high gross retention, strong product differentiators, and other recession-resistant characteristics.


Private equity firms aren’t the only active player in today’s M&A market. Strategic buyers are acquiring SaaS companies to acquire the tools they need to deliver on key objectives. Tyler Technologies, the leading provider of public sector technology solutions recently acquired Rapid Financial Solutions to strengthen its digital disbursement offerings.

Between private equity firms and strategic buyers, there is no shortage of well-capitalized buyers in the market today.

Factor 2: Few High-Quality Companies Considering a Transaction

Despite the abundance of capital, there are fewer high-quality companies on the market due to perceptions of lower valuations driven by current market dynamics. Demand is still significant, however. Although fewer companies are looking to sell, deal volume remains strong compared to the pre-pandemic period. SaaS M&A deal volume is up 80.5% through the first three quarters of 2022 compared to the same period in 2019. Investors are focused on long-term sustainability and the strength of a company’s product offerings.


Factor 3: Changes in What Investors Are Looking For

Stability and certainty are now the kings of today’s market, according to our study of software M&A trends in 2022. Thirty-one percent of investors saw gross retention as their top priority when evaluating a company in today’s market, up from 11% in 2021. Gross profit margin saw the most notable shift in priority, as 28% of investors named it as their top metric in 2022, a significant 27% increase from last year. Despite declines in the public markets, companies that are viewed as durable assets have seen valuations on par with 2021.

The world of software M&A has never been more exciting for private equity firms, who view SaaS companies as attractive due to their predictable revenue, capital efficiency, scalability, and ability to measure success. Spending on cloud-based services is expected to grow an additional $40 billion in sales through 2022, for example. Businesses serving recession-resistant end markets and those which are mission-critical to customer operations will have the most robust deals.

Get A Strategic Valuation Assessment

Software companies with the right profile continue to be highly attractive acquisition candidates and can extract a significant exit premium. Before entering the market, CEOs and founders will want to know the fair market value for their software company and the buyers and investors that they could attract. This requires an analysis of qualitative and quantitative factors specific to your company combined with benchmarking key KPIs. Let Software Equity Group perform a free, non-obligatory valuation assessment to help you determine if now is the right time to run an M&A process.

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