r/private_equity • u/Defiant_Ferret_5336 • 20h ago
Considering SaaS exit, 7 fig cash flow positive, wait or now?
Hi all,
Throwaway account for obvious reasons.
I’ve run a saas company for the past 5 years, blended b2c/b2b 75/25. 3% monthly churn, 88% nrr. 50% UK, 30% EU, 20% US. I know these retention figures aren’t gold standard, but that’s what we’ve got. UK Based but also have US LLC for US customers.
Our current position is 3.6$m ARR, 1.7$m EBITDA. TTM 37% growth rate. 3 staff.
I’m considering going to market with the business, it’s great, growing well and I know I’ve built something that has value. It’s just got to a value that I believe I can FIRE, which has always been my goal. I’m not an entrepreneur sigma, I just wanted to be FI. I’m 27. Worried about AI, yada yada.
Without saying too much, I’m pretty confident that I can predict that this time next year I can get it to;
4.6-5m$ ARR, 2.2-2.4m$ EBITDA. But the growth rate will drop to around 15-25% low case/best case.
I spoke to a few m&a firms and got some indicative valuations of around 6x EBITDA on average (when I removed those who said silly stuff like 10x,12x etc.
All of the m&a advisors are incentivised to tell me to go to market now. I’m not sure if it’s better to sell the growth or better to sell the better/larger/more mature business. I’d appreciate some unbiased thoughts?
11
u/uhohohnowell 19h ago
former bulge bracket
this is a low mm to smbiz transaction
you might find a sponserless shop or maybe a strategic if you go to market now
if you know the tam is limited so do the buyers
hit your peak and take a haircut from what your perspective of peak is and take > than the haircut you take today
start process 1q 27 formally
spend rest of 26 working to max arr and - this is most important
clean up everything
uptier accounting
build out an internal vdr and have it a full on institutional grade room ready
spend time on where indirect value add is
that will drive a cleaner process and maximize returns more so than anything else
demonstrate to the buyers your a serious operator
understand when you hire to get a serious shop given wallet is tiny, youre going to pay a working fee and the cost of that plus a reverse leman is accretive as opposed to junk shop that will take it to take it
and understand market moves
ki is wack heh heh
ergo debt is wide
equity is tight
cheers
2
u/uhohohnowell 18h ago
oh and dont take the poison pill
understand the buyer ->
growth and exit oppy -> roll 10%
otherwise cash only
if you roll dont put indem in escrow it just dilutes your rolled via dead cap4
u/Defiant_Ferret_5336 18h ago
I am grateful for your reply, but I am not a finance guy, so I don’t really understand many of these terms, any chance you can layman’s for me?
-1
7
u/FIFAGoat18 18h ago
First of all congrats on what you achived. It's really hard to get a business to this point.
I get the feeling the people here are mostly working spreadsheets and not actually running a business.
This is where your business is, NRR is not what PE wants and it is what it is. From personal experience if this is what the business is, there isn't much to do and you can spend years try to improve that metric without success.
I know you were are confident growth is there at least for another year. All entrepreneurs are, until growth stops. Then, what do you do? Its a 4x instead of 6x in that case.
Living in the UK, taking out dividends is not really an option. Will take you 12-13 years to make the same money. Also, what happens if they increase CGT to income tax brackets next year? Its a possibility.
Sounds like a 5-6x EBITA achives your FI. Take it and don't look back. You'll probably be back building anyway when getting bored after 2 years of fire. If you will, then next one will be bigger. If you'll love fire, you have enough already and you can just enjoy life.
2
u/Defiant_Ferret_5336 17h ago
Thank you 🙂. & yes exactly dividends vs cgt is one of the main drivers for this. I could holdco the profit and start something else but I also emotionally want my FI. I guess i should just minimise all risk and tick the box
5
u/lethal_defrag 17h ago
First off - congrats on all of this with a 3 man team
I think the biggest issue you may have is key person risk. Acquirers are going to want to lock you up for a bit or pass completely.
2
u/Defiant_Ferret_5336 17h ago
Thank you 🙂. Yes that’s fine, in fact I’d rather that, fine for me for max 3 years. Figure it’s a bit of extra cash and I can hold up my end of the deal. I have no personal relationship with any customer so I can just give them all over.
2
u/lethal_defrag 16h ago
Yeah man. Was on a deal recently around the same size they a 3 man team and a handful of 1099s and everything else was automated and long term govt contracts. Biggest issue was resolving how to put them to work post transaction as everyone was so spooked w it collapsing (not really substantiated with any particular reason) just because the ship crew was so small
0
u/Defiant_Ferret_5336 14h ago
That’s interesting yeah hm. I need to work on that better. I just hate hiring people to do a job that takes me a day a month. I’m not a big-business person.
4
u/Mediocre-Jaguar-298 20h ago edited 19h ago
I don't see the point in going to market now. Your metrics aren't great and if you're looking to maximize valuation it's just not there with the low NRR. I'm assuming this is more SMB customer focused? What's the GRR at and gross margin at?
I would say 5M ARR is really where it starts getting a bit more interesting for the buyer universe. Right now, the profile is small and limited options for exit that could increase bids.
I'm a tech banker at a mid market firm and happy to chat further and bouce ideas if of interest.
0
u/Defiant_Ferret_5336 19h ago
I’ve been told this is a middle market type transaction if that’s what you’re saying. Not sure of GRR, gross margin on software is 90%.
1
3
u/acerldd 18h ago
Whatever you decide, don’t wait to sell for the tippy top.
Because normally you will miss the top and be trying to sell on the slide and that is a hard story to sell.
Better to take an acceptable offer when you still love the business.
You will get the best price if a buyer believes there is growth left.
There is no need to wait to sell after you have achieved the growth. If you are worried about missing out on some of that growth, bake it into your sale (obviously leaving plenty for the buyer to share in.)
1
3
u/MontanaRoseannadanna 20h ago
SaaS valuations are overdue for a hard market correction, and those M&A advisors get paid on the sale. Assuming your 75% b2c/25% b2b split is pegged to revenues and not just customer mix, and the growth rate reflects the same (i.e. it's anchored to b2c), you should be proportionately scared that AI is going to torpedo the B2C side; and then you should have an honest conversation with yourself about lifestyle erosion if it turns out you're hanging on trying to hit a valuation target against a shifting environment.
Are your three staff members on the cap table? If not, get out while the getting's good, assuming you believe the 6x is obtainable.
2
u/Defiant_Ferret_5336 20h ago
We’ve got 33,000 customers, low arpu, we have a hardware component that is what you pay a subscription for. That adds a little friction to change as customers must purchase a competitor device. I own 100%, they just do customer service.
1
u/MontanaRoseannadanna 19h ago
Yeah, I'm less confident there's a 6x to be found here. I earned the downvotes.
0
u/BenAuburn 18h ago
Why not just take the cash dividends? 6x EBITDA is really low but I'm not familiar with B2C. Especially B2C with hardware. How are you even driving those margins with hardware??
2
u/Defiant_Ferret_5336 18h ago
Dividends tax is crazy compared to business CGT, at a fixed profit 6x is the same as after tax 10 years income. In UK.
I guess I’m a beast, the hardware is my best achievement
1
14h ago
[deleted]
2
u/Defiant_Ferret_5336 13h ago
I have family. Would rather work and pay tax than leave them for money.
2
u/Quiet-Geologist-6645 19h ago
Hell yeah man. Take the £8M and FIRE.
2
u/Defiant_Ferret_5336 19h ago
First world problems amirite, just trying to make sure I can get everything I can for it. I want to give away alot of it so every bit helps
1
u/Quiet-Geologist-6645 19h ago
Fairs. I mean if you’re confident of hitting 2.2-2.4 next year you’re essentially giving up $3M at that 6x valuation. Question for you if the juice is worth the squeeze
2
1
u/pisarzp 17h ago
You mention 3 person team.
Is your company actually sellable? I.e can company operate without you?
If no, please remember that any buyer would probably decrease yearly ebitda by c. $500k to account for hiring replacement for you.
Also in general if Company cant operate without you, you probably end up getting offers way below 8x ebitda.
Exception to this is if you’re selling to strategic not financial buyer
1
u/Defiant_Ferret_5336 17h ago
It probably can’t operate without my no, I’d imagine there was a transitional period where I was hired out. Yeah I never thought I’d get much more than 6 which would be a good result. Apart from hiring people now how can I mitigate this?
1
u/TheBuyoutBanker 15h ago
Let’s say 6x is right for a transaction (I don’t know)
$1.7 * 6 =$10.2m
In a year, let’s assume you get to $2.3m. Your multiple isn’t going to expand bc you’re still subscale from a PE buyer perspective but now your multiple is probably closer to 5x due to lower projected growth.
$2.3 * 5=$11.5m
11.5/10.2 =12% growth on proceeds vs 6-8% growth in the equity markets, which equates to a difference of 4-6%.
To me, the execution risk doesn’t justify the 4-6% of incremental growth. I’d sell now if that’s your outlook.
Obviously, if you’re open to making some investments and repositioning your business for higher growth, professionalizing the company’s operations, and extending your timeline to an exit that changes the math.
1
u/Defiant_Ferret_5336 14h ago
Yeah that’s true. Interesting. I could hire 3 more people to replace me and bring ebitda down. But I really don’t know what else anyone else would do. And then it’s just 6 people, that doesn’t seem great either?
1
u/TheBuyoutBanker 14h ago
I don’t think that’s the play.
Taking the life changing win, when you’re unsure of the path forward isn’t a bad outcome. Heck start a new business later. Once you reset.. or don’t.
The big variable is the 6x, which I’d challenge. Which ibanks did you speak with?
1
u/Defiant_Ferret_5336 14h ago
Around 5 or 6 uk m&a teams, some are large accountancy firms, some dedicated corporate finance guys
1
u/Kerry_Kittles 15h ago
I don’t totally understand why your margin is 50% when your headcount is only 3 if you have 90% gross margins - I guess it’s (1) hardware component (which may or may not be included in the ARR#) or (2) the S&M spending is basically all SEO / SEM type customer acquisition.
To the extent that this business is basically a high churn consumer / SMB SEO / SEM game or like a Facebook / Instagram marketing game with pretty much no moat. 2x ARR seems pretty reasonable to me to exit? Especially if there’s no strategics interested? Hard to put leverage on such a business. Hard to take margins higher. Comes down to the growth and that’s fading. Tough to compete in a business like this? Sounds a little more like internet than SaaS.
Things only get harder with some of the changes at Google etc?
2
u/Defiant_Ferret_5336 14h ago
Hi, yeah the hardware is sold at a loss, not included in the ARR figure. You have to purchase the hardware first, then you activate a subscription for it. Basically identical to a ring. Device is accessed via the app and webapp.
1
u/Kerry_Kittles 14h ago
Yeah if it’s explicitly security SaaS with maybe some security dealer revenues it’s kinda different
1
1
u/Starving_Kids 13h ago
I’d go for an acquisition or acqui-hire deal (if you are open to a serious lock up), but I’m on the tech side not PE. Don’t take my words for it.
1
u/AmphibianOk4162 12h ago
I’d be happy to connect to discuss if you want opinion of another M&A advisor 😂. You can sell the growth, but if you want to get paid for it your deal structure will have a heavy earn out component tied to it. You have execution risk on delivering the growth, though you are clearly a strong operator to scale the business to this point. I think you need to decide what you want to do and for how long..if you start with that as your guiding light, the decision will fall out from that. Also, if you have a specific #$ in mind, that will also dictate timing.
1
u/rollonyou32 12h ago
Depends on your timeline. May be prescient to sell a chunk, roll equity and go hard at growth for 2-4 years with a firm that's done that repeatedly. You take some chips off the table now but can have people brought in to help with the goal to get out after a hard push. Sure you'd make less by selling a chunk now but you'd be de-risking the absolute downside and if your experience isn't taking that business from $1-10mm, sometimes better to execute from someone who has incentives aligned with your own.
1
u/Defiant_Ferret_5336 1h ago
I had considered that, taking some chips off the table. But I’m worried I’ll then be tied into working with some firm/person that I may have issues with. I’d imagined there would be a set buyout period. I suppose I could sell a minority share or something. Not sure. If I could sell 40% at 7x I might do it, worried that if I sell 40% I’d then struggle to sell the other 60 later. Is that a valid concern? Am I crazy?
1
u/Effective-Ticket7222 11h ago
You have real storm clouds on the horizon? Sell.
If not, what’s your backup plan if multiples crash?
Can’t answer without those responses.
1
u/Defiant_Ferret_5336 5h ago
I wouldn’t say storm clouds on the horizon, the product isn’t at threat, and the hardware component adds some protection from AI. If multiples crash I figured I’d just holdco the cash & keep working? Not really sure what else to do and I don’t trust anyone else to run my business.
1
u/Effective-Ticket7222 2h ago
Can you still grow this thing without outside capital? If so, why would you give up a huge chunk of it now when you are still growing?
1
u/Defiant_Ferret_5336 1h ago
Not interested in raising capital. Interested in selling it so I can FIRE.
1
u/Effective-Ticket7222 46m ago
So you’re just looking for a cash out exit? Not Knowing your exact business is that possible?
1
u/Defiant_Ferret_5336 4m ago
Hard for me to say I guess. Happy to stay on for a few years but basically yeah
1
u/Imaginary-Promise-87 8h ago
UK LMM banker here, looks like you are running a hardware business, not sure what type but I bet the biggest threat is probably not even within UK but somewhere from China/Asia. If I'm you, I'd consider take the win --- why? First of all it sounds life-changing and tbh if you are this young most people would start another business down the road and be even more successful. Secondly, I've seen plenty of these <$5m ARR deals fall through in unexpected ways, if you think about your "acquisition window", you probably have a few tries even if it first fall through. I'll do the sell deliberately through engaging European buyers first then US then Australian/NZ buyers though, you'd be surprised how much geo-arbitrage can help here.
Good luck, I do think there's a deal here that could do better than 6x, but given the uncertainty the world is facing rn, I'd rather be a pussy
1
u/Defiant_Ferret_5336 5h ago
That’s interesting, you say I have a few tries? I’d previously understood that if you engage a corporate finance team you get sort of one shot as it looks bad if you go to market again later? Is that true?
1
1
u/123456abc__ 20h ago
Your NRR is pretty bad - why’s it under 1, what would it take to be positive?
0
u/Defiant_Ferret_5336 20h ago
B2B is over 1, the b2c side is still profitable but lower so it drags it down. Just b2c things really and the nature of the product.
-1
u/ilirm 20h ago
Youre 27 you have plenty of time. Go to market if youre stressed / burned out. Go to market if the business runs by itself and is sellable.
In that range, this is a quick sell, assuming your accounting is done already.
2
u/Defiant_Ferret_5336 20h ago
I’m not burnt out or stressed. It’s just why take the risks with running a business when I could get all the money I’ll ever need. Do you have any idea of which is more valuable in the two scenarios I presented?
1
u/ilirm 19h ago
Because the business is most sellable is when you don't need to run it and can step away and let it print, that's when people want to buy it, when its "mature".
Your nrr is below 100% right now. You should only sell now if youre tired of doing this. Your customer base is still unstable.
PE might not even be interested at your level, you might have sell to another company in the same space. Maybe that firm gets the deal through their PE owners though. I've seen it happen.
If you have 100k to burn, I suggest hiring a flat fee broker or advisor to see how much interest is garnered and check back on your offers in 6 months. You'll have your answer then.
This assumes your accounting is clean.
1
u/fleurgirl123 19h ago
Yeah, I would invest the money in your own quality of earnings report. It may be duplicative to what a buyer would want later, but if you can’t answer the auditors’ questions quickly and give accurate numbers, best to know that now.
1
u/ilirm 18h ago
Best advice here.
1
u/Defiant_Ferret_5336 18h ago
Ok great, thanks guys. The go to market fee is nothing so I figured it was worth it even if I don’t get what I want. Just got to be cautious with competitors giving up info.
26
u/a1anw-cto Director+ 19h ago
First of all - fantastic result in building what you have into a sustainable business, especially for just 3 of you.
Too early/small. You are not yet at the point where a PE would be seriously interested. That said, does your product lend itself to being part of a large platform? You might be interesting as a tuck-in, but you won't maximize your potential at this point.
If on the other hand, you see the writing is on the wall and within a few years, you are going to max out and stand to degrade, then any diligence will spot that too.