How acquirers look at your company

  • No Revenue 80/20. You don’t want 80% of revenue coming from 20% of customers. Don’t buy a business that has a few customers making up the bulk of revenue. It increases risk and reduces your growth levers and scalability. For a $10m ARR business, you want hundreds or thousands of customers, paying hundreds or thousands of dollars a month. There’s a margin of safety built in with a more numerous customer base.
  • High Margins. Software, for now at least, is in the super-normal profit zone. Margins are 80% and above. While this can makes us lazy and financially inefficient — for prudent operators — it also creates a fantastic safety net when the economy goes through a downturn. The ability to suffer a revenue reduction, and restructure to be profitable or break-even, means your chance of coming out the other side of a set-back is high.
  • Default: Alive. Do not buy a shrinking business. Warren Buffet says it simply: “turnarounds rarely turn around”. Why make life harder by taking on a challenge like this? If you buy a growing business — even if the assumed low-hanging-fruit doesn’t materialize and you find your ability to impact growth is low — you still have a good business!
  • Manageable Churn and Healthy Install Base. Gross revenue churn — that is, the average monthly amount of revenue that cancels or does not renew — should be less than 2% (remember that’s a quarter of the business GONE in the first year you own it!) and the install base—revenue from existing customers, plus upgrades and less downgrades — should be flat or positive. Hopefully you see some ways to reduce churn and add more value to the install base. Ultimately — the goal is to get to a positive install base, where the business grows naturally.
  • Look for budget misalignment. Is one area getting more than its fair share of dollars, so that another is losing out? For example — is the Product and Engineering line eating up the bulk of the spend, while Sales and Marketing has a low allocation that stays flat? A rule of thumb for us is ‘equalize the buckets of cost’ — that means, after cost of business (should not be more than 20% in a SaaS company), sales and marketing, product and engineering, and general admin and management should be approximately ⅓ of the budget each.
  • Validate Financials. Hopefully this is the most obvious statement. But — some things to look for — high AR (accounts receivable) could mean unrecognized churn; and high DR (deferred revenue) means customers you need to provide service for without getting paid, and that may not renew. Make sure the renewal and upgrade rate is high (a good rule of thumb is that at least 80% of customers renew and 20% upgrade —close to a flat installed base), otherwise you have a ‘leaky bucket’ problem. When you’re valuing a company based on a multiple of it’s revenue - paying for revenue you don’t receive and customers that may not renew doesn’t really make sense!

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store