A lot of us have witnessed what is referred to as a “heat check” in basketball, where James Harden or Steph Curry will jack up an ill advised three after having made a handful of buckets in a row, to assess how hot they are at the time. This may appear to the layman as a crazy shot; however, there’s a high probability that they will make the basket because they are hot, and often they do, thus confirming their scorching status.

This concept can be likened to today’s climate as it relates to M&A valuations, in exploring whether a business owner can take advantage of our current valuation heat, to receive a premium. So, the question is, how can an entrepreneur cut to the chase on the front end to assess if they’re a likely candidate to realize such an outcome without getting dragged into a rabbit hole of time spent and potential wheel spin with M&A/funding discussions which may negatively impact their business?

For starters, it never hurts to have a brief discussion with an M&A professional or even go back and forth on email a few times to figure out where your candidature stands- are you an ideal candidate, not so great fit, or somewhere in the middle (e.g. nice profile yet too small)?

Here are a few basic fundamentals that would qualify a company as a “great candidate” that will have options, and is something to be mindful of before starting any discussions:

Technology/Business Services 

  • =>$10mm in revenue and =>$2mm in profit
  • Growth of ~20% (higher the better)
  • Gross profit of ~50% (higher the better)
  • Recurring revenue of ~75%+ (higher the better); low churn of 1-2%/month (lower the better)
  • Specialized offering, more verticalized (application or vertical) vs. horizontal
  • No client greater than 20% of revenue
  • EBITDA Multiple of 7-15x
    • range depends on how good or bad the numbers above look
    • businesses w/very strong business models and profiles per above are selling at a premium of 12-15x

Software

  • >$5mm in revenue and modest loss to profitable if SaaS; >$10mm in revenue and $2mm profit if on-prem license + support/maintenance and prof serv revenue
  • Growth of ~25% (higher the better)
  • Gross profit of ~75% (higher the better)
  • Recurring revenue of ~75%+ (higher the better); low churn of 1-2%/month
  • Specialized offering, more verticalized (application or vertical) vs. horizontal
  • Revenue multiple of 3-7x for SaaS; EBITDA Multiple of 7-15x
    • range depends on how good or bad the numbers above look
    • businesses w/very strong business models and profiles per above are selling at a premium of 5-7x

If you’re near, at or above the size/operational thresholds noted above, and want to get more specific valuation feedback, let’s have a 20-30 min call to discuss the particulars and see where you are likely to end up in today’s market, and if you may be in line for such a premium. It’s always good to track the items mentioned above regardless, and have them available for the last handful of years as well as year to date, and current year budget, to not only see how you’re business is trending as an owner, but also be able to quickly share these high level stats, to receive quick tangible feedback, so as to  not waste time, energy, and cycles. Most acquirers/investors have defined strategies and mandates which the investment profile must fall within, otherwise they can not and will not proceed.

Thanks, and enjoy the rest of your summer.