Forbes M+A SaaS

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
SoftwareasaService(“SaaS”)ValueDriverReport
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C O N F I D E N T I A L
2 0 2 0

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
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Subscription Based model will
typically be valued on a Revenue
Multiple
Transaction Based model will
typically be valued on an EBITDA
Multiple
Note: This presentation is primarily focused on SaaS companies that have a subscription-based pricing model
Software as a Service (“SaaS”)
companies are defined as companies
that primarily offer their solutions via
the cloud and through a subscription or
transaction-based pricing model.

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
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TrendsintheSaaSindustryarereshapinghowinvestorsthinkofvalue
Private
equity
increasingly
more active
investor
Companies finding
it hard to scale
allowing a rise in
competition for
smaller players
Private equity
increasingly more
active investor
Vertical-specific
SaaS applications
are expected to
demand higher
multiples
Shift to PaaS*,
allowing a wider
range of features,
widgets, and layers
Broader adoption
of mobile SaaS
apps is shifting
industry focus
1 2 3 4 5
* PaaS: Platform as a Service

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
ForabusinessownerofaSaaSbusiness,itisimperativetounderstandwhatdrivesvalue
Understanding where to focus strategic decisions will build the highest value for an Entrepreneur upon an eventual exit
Emerging trends in the SaaS
industry are constantly
reshaping buyer/investor
demand within the various sub-
verticals.
Each buyer/investor will view
“value” differently depending
on how they view the
acquisition opportunity; basic
supply/demand curve
Valuations vary from company
to company, depending on
several “Key Value Drivers”.
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SlightlymorethanhalfofSaaSacquisitionsarecompletedbyStrategicPartners
Approximately 53% of SaaS M&A transactions were completed by Strategic buyers and 47% were by Financial buyers. Strategic
companies were acquisitive as they recognized clear potential synergies with growing SaaS companies.
7.6%
39.8%
31.8%
20.8%
SaaS M&A ACTIVITY BY BUYER TYPE (2017)SELECT STRATEGIC BUYERS SELECT FINANCIAL BUYERS
Private
Strategic
Publicly Traded
Strategic
Private Equity
Backed Strategic
Private Equity
Direct
Note: While there are hundreds of potential high-quality strategic and financial partners, the companies depicted are a representative sample of who has been particularly acquisitive in the past couple of years.
Source: SEG Snapshot

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
ValuationrangesforSaaScompaniescanbesignificant
3.7x
4.3x
4.7x
5.2x
<$10M $10M - $20M >$20M - $50M >$50M - $100M
Revenue Multiple By Seller Size (2Q15 – 2Q18)
Median
90th Percentile
10th
Percentile
90th Percentile
10th
Percentile
10th
Percentile
10th
Percentile
90th Percentile
90th Percentile
Median
Median
Median
There were 829 SaaS M&A transactions in
2017, an increase from approximately 750
and 600 in 2016 and 2015, respectively.
We expect this number to continue to
increase in the next few years.
2Q18 posted a median TTM Rev multiple
of 4.5x. The median has remained above
4.0x since 2016 other than 4Q16 when it
dipped to 3.8x. We expect multiples to
remain high through 2019 and into 2020.
Key Takeaways
4.5x
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Source: SEG Snapshot

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2.4x 2.4x
2.8x
3.2x 3.3x
3.7x
3.9x
4.7x 4.7x
5x
HR & Talent
Mangement
Communication/
Collaboration
Storage &
Systems
Management
CRM Marketing Supply Chain &
Logistics
Security Content &
Document
Management
Analytics &
Business
Planning
Enterprise
Resource
Planning
eCommerce
Enablement
Software
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Marketdemandvariesamongsub-sectors
Commerce Enablement
Software achieved the
highest median EV /
Revenue multiple of
5.0x in 2017.
CRM & Marketing
accounted for the
highest number of
SaaS transactions in
2017 with 181
completed deals.
Median Revenue Multiple By Select SaaS Sub-Sectors (2Q15 – 2Q18)
Certain sub-sectors are more attractive today, however the demand is always shifting, and another group can become “en-vogue” at any time.
Key Takeaways
5x
Source: SEG Snapshot

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
$65,000 $75,000 $85,000 $95,000 $105,000 $115,000
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Sohowdoesabusinessownerknowwhatvaluetheirbusinesswillattractonthemarket?
THE BELL CURVE
We believe the universe of possible
enterprise valuations typically fall
into a bell curve distribution.  Most Likely Valuation 
Premium Tail  Value Tail
Valuation is based on many factors and is more complex than most business owners understand
Where are you?

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Rangeanalysisof“KeyValueDrivers”isstronglycorrelatedtoacompany’smarketvalue
Growth Rate Revenue GREM EBITDA
Customer
Churn
Customer
Concentration
Competition
Average
Contract
Value
Customer
Acquisition
Cost
Industry
Outlook
Recurring
Revenue
Payback
Period
>XX% >$XXM >XX% >$XM <X% Diversified Blue Ocean High
Efficient
Spend
Positive
Majority
Recurring
Short
High E
N
H
A
N
C
E
R
S
End
V
A
L
U
E
R
A
N
G
E
E
R
O
D
E
R
S
Low
End
<XX% <$XXM <XX% <$XM >X% Dependent Red Ocean Low
Inefficient
Spend
Negative
Minority
Recurring
Long
Note: Illustration of actual company.
Key Value drivers will differ for each company based on size and sub-sector

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“KeyValueDrivers”forSaaScompaniesfallintothreemaincategories
*LTV/CAC = Lifetime value of customer / customer acquisition cost (see appendix for further information)
• LTV / CAC Ratio*
• Customer Lifetime Value
• Customer Acquisition
Cost
• Payback Period
• Payment Terms
01. Capital Efficiency
• Magnitude
• Annual Recurring Revenue
• Total Revenue
• EBITDA / Cash Flow
• Concentration
03. Certainty of
Continuity
• Gross Margin
• Customer Retention
• Growth Rate
• Addressable Market
• Industry Subset
02. Market Demand
Premium

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
Investorsfactorcertaincapitalefficiencymetricsintothevaluation
The ratio of output
divided by capital
expenditure.
Essentially the
predicted Return on
Investment (ROI)
01. Capital Efficiency
LTV / CAC Ratio
One of the top drivers of valuing SaaS companies. Indicator of over or underspending to acquire new customers.
Customer Lifetime Value (LTV)
Average net profit a single customer is predicted to generate over the duration of life of their account.
Customer Acquisition Cost (CAC)
Efficient use of capital to acquire new customers is rewarded with a higher valuation. It is typical to see a
diminishing return on CAC as a business grows in size.
Payback Period
Typically measured in months to fully pay back sales and marketing investment with customer proceeds. The
quicker the better.
Gross Margin
Gross margin is a great indicator of how efficiently the company runs. SaaS companies typically have higher
gross margins relative to other industries as there are less COGS.
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Marketdemandsignifiesasuperiorproduct
Achieving premium
valuations based on
the strength of
product demand from
customers
02. Market Demand
Premium
Customer Retention
Critical number when valuing SaaS companies. Retention rate helps to value existing customer annuity and
“stickiness” of product.
Growth Rate
Indicates both the timing and likelihood of future profits. Generally, higher revenue growth leads to higher
valuation multiples.
Addressable Market
The larger the addressable market for a company, the more upside there is for growth. Too small a niche can
limit growth, and too broad could be stifled by competition.
Industry Subset
Different industry subsets are more attractive than others.
Payment Terms
Includes price, renewal structure, monthly vs. annually, etc. Ability to achieve favorable terms demonstrates
the market’s perceived value of the product.
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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
Valuationisbasedonthepresentvalueoftheriskadjustedfuturecashflows
The informal
measurement of the
likelihood that
forecasted trends are
accurate
03. Certainty of
Continuity
Magnitude
Generally, larger companies are valued higher and are inherently less risky due to less customer concentration,
geographic diversity, etc.
Revenue
High revenue suggests less risk but can be misleading as it is a lagging indicator and does not always indicate
future performance.
Annual Recurring Revenue
ARR provides a picture into the future risk profile of a company. Includes both new sales and customer retention.
EBITDA
Higher EBITDA suggests less risk and more efficiency; should be combined with Growth Rate. (see GREM)
Cash Flow
Cash flow is a solid indicator of the overall health of a company.
Concentration
Customer, supplier, industry concentration, etc. Dependence on few is a major risk factor.
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Remember;valuationisintheeyeofthebeholder…
…AND THE BEHOLDER IS THE BUYER/INVESTOR
Ultimately, each Investor develops their own investment
thesis that drives their perception of value.
Views on synergistic opportunities, scarcity of similar
companies on the market, and growth potential will affect
valuation.
On average, we see approximately 1 in 100 interested
buyer/investors fall in the upper tail; and from low bid to
high bid approximately a 250% difference in valuation.
1% of viable
interested buyers
Creating the right “value story” is key to garnering the highest value when going to the market
Most Buyers 
Premium Buyers


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InSummary;Anearlyunderstandingofthefactorsthatdrivevalueisimportantforstrategicdecision
makingpriortoanexit
• Every Software as a Service company is different and will demand a different value from the market.
• A valuation is never done via a simple multiple and a deep dive into a company’s differentiating
features must be performed in order to extract the highest possible value.
• Understanding the value drivers that are specific to your business and industry is important when
developing a 3-5 year exit optimization plan.
• Improving multiples has a significantly greater impact on your business’ value than simply improving
the revenue or EBITDA.
• The only way to truly know your company’s value drivers and ultimate market value is to see what the
market dictates in a full auction process.
• Forbes has an Exit Optimization product that pulse checks the market to find out how each value
driver influences valuation for your specific company.
No Standard
Formula
Importance of
Value Drivers
Prepare Early for
an Exit
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Appendix
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DAN PELLEGRINO
Dan Pellegrino, a Managing Director and Partner at The Forbes M+A Group, focuses his practice on
software and technology clients. Dan brings acquisitions and operational expertise in the tech space
as a business intermediary, management consultant, investor and business owner/entrepreneur.
Dan has over two decades of experience advising companies on strategic growth initiatives, mergers,
acquisitions, valuation, and transactional synergies. Dan’s advisory work spans transactions ranging
from small businesses and product line divestitures to Pfizer’s $68 billion acquisition of Wyeth.
In addition to his advisory work, Dan is an investor and entrepreneur. Dan founded and eventually
sold White Frog OS, a virtual white label digital agency that specializes in digital marketing for larger
traditional marketing agencies. He also co-founded showtimemaps.com, a software development
company that created a map-based platform to purchase movie tickets. He co-founded and helped
grow Ban.do, an ecommerce consumer products company that sold in 2012 to Life Guard Press, a
synergistic strategic buyer.
Dan also founded South Peak Capital, a lower middle market M&A transaction advisory firm in Los
Angeles, California that that focused on creative transaction financing. Prior to South Peak, Dan was
with SDG (Strategic Decision Group), now a part of IQVIA, as a senior level consultant and project
manager, where he focused on the life sciences, biotech, and pharmaceutical industries. Prior to
that, Dan was a senior consultant at Deloitte Consulting, where he helped Fortune 500 companies
with operational and strategic initiatives across multiple industries including life sciences, financial
services, healthcare, banking, insurance, manufacturing, energy, and higher education.
Dan has a Master of Business Administration (MBA) degree from the University of Notre Dame and a
Biology and Chemistry bachelor’s degree from Baylor University in Texas where he was also a pole
vaulter. Concurrently with Notre Dame, Dan spent time at EDHEC in Lille, France studying European
Business.
SaaS Software
Enterprise Level Software
Life Sciences
Bio-tech
Med-tech
Business Intelligence
Analytics
Fin-tech
Alternative Energy
Digital Advertising
Ad-Tech
Social Media
Lead gen. / ecommerce
Professional Services
Managing Director
(720) 545-9769 direct
Dan.Pellegrino
@ForbesMA.com
INDUSTRIES

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
ExpectedgrowthrateforanaveragevaluedSaaScompany
*Source: SaaS Capital
Above average growth rates will garner premium valuation results (ceteris paribus)
0
10
20
30
40
50
60
70
< $1 million $1-$5 million $5-$10 million $10-$20 million $20-$50 million $50+ million
Median
Growth 2018
Annual Revenue
GrowthRate
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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
GREM is an acronym for
Growth Rate + EBITDA
Margin
In our experience this numerical value
can show how healthy a SaaS company
is relative to its peers regardless the
size of the company. The higher the
number the healthier the company
and thus the higher valuations it will
see on the market.
GREM=HealthTestforSaaSCompanies
Example
Calculations
• Annual Growth Rate = 35%
• EBITDA Margin =
$1,200,000 EBITDA /
$6,000,000 Revenue = 20%
35% + 20% = 55%
= Very Healthy
SaaS company
< 10%
Poor
Health
10%-30%
Below Average
Health
30%-40%
Average
Health
40%-50%
Above Average
Health
50%+
Very
Healthy
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AnalyzingChurnRates
Source: Pacific Crest Survey
Above average churn rates will garner premium valuation results (ceteris paribus)
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Annual gross dollar churn (without the benefit of upsells) is 6%. The results were
virtually the same when including companies < $2.5 MM in revenues. This result is
lower than the 2013 result of 8%, but higher than the 5% found in 2012.
Annual Gross Dollar Churn (Excluding Companies < $2.5 MM in revenue)
(1): Excluding the benefit of upsells
156 respondents
Reported median annual unit churn (by customer count) is 8%. This follows conventional wisdom that unit
churn is generally higher than gross dollar churn, as smaller customers tend to churn more often. In
comparison with previous results, essentially the same result was found in 2013.
(1): Percentage chum of # of paid customers at year-end 2012 that were still customers at year-end 2013
160 respondents
59
48
20
13
16
0 10 20 30 40 50 60 70
<5%
5-10%
10-15%
15-20%
>20%
37
33
14
37
39
0 10 20 30 40 50
1-3%
4-6%
7-9%
10-15%
>15%
Median ≈ 6%
Median ≈ 8%
Annual Unit Churn(1) (Excluding Companies < $2.5 MM in revenue)

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I n v e s t m e n t B a n k i n g A d v i s o r y S e r v i c e s
Definitions:
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BreakdownofLTV/CAC
• A ratio that is too high suggests that the company is
underspending and has an opportunity to gain even
more customers.
• A low ratio suggests that the company should spend less
or find other ways to acquire customers. A ratio less
than 1x is an unsustainable business model.
# of New Customers Added
Total Sales & Marketing Expenses
CAC =
=LTV
Average Monthly Revenue Per Customer
Customer Churn Rate
For growing SaaS companies, the industry
standard is typically around 3x or higher.
A higher ratio suggests a higher ROI on
sales and marketing spending.
3x
Definitions

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ExampleofLTV/CAC
Sales and Marketing expense of $100,000
with 100 new customers added in the last
month.
Customer monthly churn rate of 10%.
Average Monthly Revenue of $500 per
customer.
The following is an example of a SaaS company with:
Example
100
$100,000
CAC =
Definitions: 10%
$500
LTV =
$1,000
$5,000
LTV / CAC =
5.0xLTV/CAC Ratio

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