Building your own business in the Salesforce ecosystem can be a rewarding experience personally and, hopefully, financially too.
Even if you won’t even consider parting with your “baby” right now, it’s important to have an exit strategy in mind so you can effectively plan for the long term, making the right decisions to steer your company towards your desired exit strategy.
Mergers and Acquisitions
Selling your business through an M&A deal has a number of advantages, like providing a clear exit date for owners and investors, or the chance to stay at the business after the deal takes place.
Owners are given the opportunity to stay in the business and make good use of the new talent from the buyer’s company, or leave.
Competition between different bidders can also drive up the price, meaning a stronger profit for relevant parties.
For the Salesforce ecosystem, particularly, acquisition by the CRM giant itself may be a lofty – but still realistic – ambition.
The CRM giant is no stranger to acquiring ISVs and middleware players, and owners might want to consider if their tech aligns with Salesforce’s roadmap for this reason.
Bigger is Better
Consider, for a moment, the other side of the coin. A large corporation – the kind that would be looking to acquire an ISV – will likely want such a business to be established, reputable, functional, and, ultimately, pretty big.
From the perspective of an ISV owner, this means that your business has to be fairly sizable before any M&A deal can seriously be considered.
M&S advisory business Software Equity Group (SEG) says there is a “clear benchmark” for companies looking to get buyers interested, though it is not set in stone.
In a 2022 post, SEG said that the bar used to be an annual recurring revenue (ARR) of around $10M, but that had dropped down to around $5M SaaS ARR.
“Achieving this level of scale signifies enough product-market fit and removes enough early execution risk to signal to the buyer community that your company is an attractive acquisition target,” SEG says.
While a strategic buyer could theoretically be interested in a smaller purchase, it will likely be a less competitive process, resulting in a lower price. A smaller purchase is more likely to be quietly and wholly assimilated into the product portfolio as well, instead of keeping a distinct brand identity for some period of time.
Above the $5M ARR benchmark, interest from several potential buyers is more likely, but don’t celebrate just yet – there will still be much that needs doing.
Get Your House in Order: How to Prepare for an M&A Deal
While $5M ARR is a good benchmark to hit, businesses looking to acquire you will likely want to know what your roadmap is and how you’re planning to get to $10M ARR, retain customers, stay (or become) profitable, and grow for the future.
At the start of the year, Salesforce Ben spoke to Alex MacKay, of Tequity Advisors, about the top factors that are likely to affect valuations.
Tequity says that YOY growth has historically been “number one” when it comes to M&A, and it remains a key factor, but a number of partners were finding it harder to maintain historic levels of this metric. For those who could, however, valuations increase.
There are several key metrics that should be in order before an M&A deal goes ahead.
First, it’s important to show that any plan to grow ARR does not take for granted your current base of revenue – show that you have a plan to retain your existing clients.
Second, it goes without saying that being profitable is preferable. If you’re currently not, then do you have a sound, structured plan on how to achieve it?
Third, what does your roadmap look like? This is your opportunity to demonstrate how your business can (and will) be scaled, making it a more tempting M&A target for prospective buyers.
Understanding Multiples Is Half the Battle
A multiple is a metric that compares one factor of a company’s finances, like earnings, to its market value.
For example, if your SaaS ISV has $5M in ARR and is acquired for $25M, that’s a 5x ARR multiple. This figure is reached by dividing the acquisition price by the ARR.
In the tech sector, it has historically been the industry norm to use revenue multiples, but profitability has more recently become a major consideration too.
Metrics like EBITDA and net income are considered too. It could be argued that EBITDA is equally as important as revenue, or even more so. While ARR is a reflection of how much you’re selling, EBITDA is a closer indication of how efficiently your business is turning this revenue into profit, which is, ultimately, the goal.
Comparing the multiple proposed in a potential M&A to the industry average can help you assess whether your company is being undervalued. A business owner with a thorough knowledge of their industry’s multiples can help with assessing any M&A opportunity.
In a post from January this year, SaaS Capital said that bootstrapped companies yielded a predicted private SaaS company valuation multiple of 4.8x, while equity-backed companies yielded a predicted valuation multiple of 5.3x, according to their data.
This seems to align with figures from previous years, too. According to a post from revenue automation company ScaleXP, ARR valuation trends in 2023 stood at around 5.5x, meaning a SaaS company generating $10M revenue could expect a valuation of $55M.
Other multiples for an ISV owner to consider include public market valuation and net revenue retention (NRR).
Who’s Going to Buy My Company?
Part 1: ISV and GSIs
An independent software vendor (ISV) might aim to acquire another ISV for a number of reasons, one of which is expanding product offerings, or “product roll-up”, to cross-sell more value to current customers with extra functionality.
So-called “acquihiring”, where one ISV acquires another to gain access to the deep expertise of its staff, is also a practice worth understanding.
Also, speaking frankly, one ISV may simply want to eliminate a competitor that offers overlapping or adjacent technology through an acquisition.
When an AppExchange company gets backing from venture capital or private equity, a more comprehensive product offering can be achieved by acquiring another ISV.
When the document generation solution, Conga, got a $70M investment, they acquired six companies, including Action Grid, Novatus, and Contract Wrangler. Formstack and Validity also went on similar buying sprees.
Global system integrators (GSIs), by their nature, often deal with large enterprise clients who want industry-specific, custom Salesforce solutions. They are perhaps the ‘top dogs’ when it comes to Salesforce implementations.
Acquiring an ISV will allow the GSI to embed their product into deals, making their offerings more tempting to potential buyers.
There is also the simple win a GSI can achieve by making its own platform more efficient and capable. This may draw them to acquiring ISVs that tackle gaps in Salesforce functionality.
Buying a high-profile ISV may also boost the GSI’s visibility on the AppExchange and signal a long-term commitment to the ecosystem, making them more of a contender for future partnerships with Salesforce.
Part 2: Private Equity Recapitalization
Owners looking to take a step back and sell a portion of their business while still keeping enough of it to benefit from its future growth might want to consider recapitalization by bringing in a private equity (PE) firm.
While someone may have sentimental reasons for wanting to keep a stake in their business, it may also turn out to be a financially wise move.
If the future holds great things for your business, you might regret quitting it too early and just watching from the sidelines.
The owner’s role might be radically downplayed during the recapitalization, but they may be able to stay involved, perhaps in a more flexible capacity.
Also, an injection of cash from a PE firm could help a struggling business in a rocky market.
PE plays a significant role in the Salesforce ecosystem, with firms often seeking to get in early at a company where they see potential and sell it for profit further down the line.
Notable deals involving PE firms include:
- Conga’s $70M investment from Insights Ventures in 2015.
- Thoma Bravo acquiring Apttus in 2018 (later merged with Conga in a $715M deal).
- Main Capital Partners acquiring Cloud Coach in June 2023.
- Scaleworks acquiring marketing attribution Full Circle Insights in July 2023.
Venture capitalist Brad Feld once outlined the so-called ‘40% rule’, supposedly an indicator of a healthy SaaS company.
In a 2015 blog post, he wrote: “The 40% rule is that your growth rate + your profit should add up to 40%. So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.”
There’s no specific revenue or profit number that can guarantee a deal, of course, but industry benchmarks, like the ‘40% rule’, can be used.
According to tech data insight company ScaleX Invest, three primary valuation methods in SaaS are revenue multiples, EBITDA multiples, and discounted cash flow (DCF).
Part 3: Salesforce
Getting acquired by Salesforce is a lofty ambition, but the CRM giant has acquired several big names in the ecosystem in recent years.
In May, Salesforce agreed to an $8B takeover of data giant Informatica, as part of a bigger plan to strengthen their data foundations needed to support their AI ventures.
In September 2024, we reported on how Salesforce was acquiring Own Company in a deal worth $1.9B in cash – the largest deal since Slack ($27.7B).
Multi-billion-dollar deals hit the headlines when they take place, but nine-figure deals like Zoomin ($450M) also take place.
AI and data-platform ISVs seem of particular interest to Salesforce, which makes sense considering their commitment to their flagship AI suite, Agentforce.
ISV owners looking to be acquired by Salesforce might want to consider whether they’re a good fit – with a sizable enough footprint in the ecosystem and a way of fitting into Salesforce’s roadmap, particularly focusing on AI and data.
Final Thoughts
It’s always worth considering your exit strategy, even if the idea of leaving your business is a faraway prospect in your mind right now.
There are a range of pros and cons for each strategy in particular, and it’s often not just a matter of finding the best one – rather, it’s worth asking what is the right one for your business.
If you are interested in selling your company, then contact ben@salesforceben.com.
