The Ultimate Guide to the SaaS Software Sector M&A

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TABLE OF CONTENTS:

Chapter 1

Introduction to the SaaS Software Sector

As the SaaS industry matures, companies are facing both unprecedented opportunities and challenges. Growth continues to be fueled by the enterprise shift to cloud-native solutions, the acceleration of automation, and the increasing reliance on AI, machine learning, and advanced analytics. SaaS businesses that can leverage these trends, while ensuring scalability and operational efficiency, are well-positioned for continued expansion.

The global SaaS market was valued at approximately $333 billion in 2023 and is expected to reach $819 billion by 2030, growing at a CAGR of 13.7% from 2023 to 2030. Some reports suggest even faster growth rates, particularly within certain sectors. Middle-market SaaS companies are capturing significant attention from investors due to their ability to scale quickly, capitalize on recurring revenue models, and disrupt traditional industries with innovative offerings.

As a CEO or founder of a middle-market SaaS company, you are likely keeping a close eye on market trends, investor sentiment, and growth strategies. Whether you’re considering an exit, a recapitalization, or simply raising growth capital to fuel the next stage of your business, timing and market positioning are critical.

In this guide, we dive into the current M&A landscape for SaaS businesses, examining what’s driving investor interest and how recent deal activity reflects the market’s evolving dynamics. We’ll also take a closer look at what strategic and financial buyers are prioritizing when evaluating SaaS companies, along with key factors to consider when you’re preparing for a sale or capital raise. Finally, we will outline how Forbes can help you navigate this complex process and maximize value as you consider your options.

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The global SaaS market was valued at approximately $333 billion in 2023 and is expected to reach $819 billion by 2030, growing at a CAGR of 13.7% from 2023 to 2030.

Chapter 3

Key Players in the SaaS M&A Market

With the continued momentum in the SaaS industry, M&A activity has surged, attracting significant interest from both strategic acquirers and private equity (PE) firms. These buyers are primarily interested in capitalizing on the growth potential, scalability, and recurring revenue models that SaaS companies offer, making the sector highly competitive for acquisition.

Strategic acquirers and PE firms each bring different objectives to the table, but both have been highly active in the SaaS space. In fact, SaaS companies with strong customer retention, high annual recurring revenue (ARR), and innovative product offerings are seeing increased demand from buyers looking to expand their portfolios or enhance their technological capabilities.

Strategic buyers—including traditional technology companies, private equity-backed strategics, and pure-play private equity firms—are reshaping the SaaS M&A landscape, especially in the lower middle and middle markets. Historically, a significant portion of SaaS acquisitions involved strategic buyers, including technology companies seeking to enhance their platforms, expand into new markets, or gain access to valuable intellectual property. However, private equity has become a major driving force in SaaS M&A, particularly in the middle market. In 2023, private equity-backed strategics and PE firms accounted for around 60% of SaaS acquisitions. These buyers are actively targeting high-growth SaaS companies, either as platform investments or as add-ons to their existing portfolios.

Among the most active strategic buyers are major cloud providers and software giants looking to consolidate their dominance or expand into new verticals:

In 2021, Salesforce completed its acquisition of Slack for $27.7 billion, expanding its presence in enterprise collaboration software. This strategic acquisition helped Salesforce strengthen its platform’s communication and integration capabilities.

In 2022, Microsoft acquired Nuance Communications for $19.7 billion, focusing on enhancing its healthcare AI offerings. This acquisition bolstered Microsoft’s ability to deliver AI-driven SaaS solutions for healthcare providers, showcasing its expansion into vertical-specific SaaS markets.

Adobe’s acquisition of Frame.io in 2021 for $1.275 billion expanded its cloud-based video collaboration tools, aligning with its creative and content management SaaS offerings. Additionally, Adobe’s purchase of Figma for $20 billion in 2022 strengthened its position in UI/UX design and collaboration software.

In 2022, Oracle completed its $28.3 billion acquisition of Cerner, a healthcare-focused SaaS provider. This move solidified Oracle’s push into the healthcare sector, leveraging Cerner’s electronic health record (EHR) technology to offer industry-specific SaaS solutions.

While strategic acquirers focus on expanding their platforms, private equity firms are aggressively targeting SaaS companies, particularly those with strong recurring revenue models and growth potential. Some of the most active players in this space include:

Thoma Bravo acquired SailPoint, a leader in identity security SaaS, for $6.9 billion in 2022 and Anaplan, a business planning SaaS, for $10.7 billion the same year. Thoma Bravo’s focus on high-growth SaaS businesses that enhance operational efficiency has made it one of the most active PE firms in the sector.

Vista’s acquisition of Apptio, a cloud-based financial and IT management SaaS, for $4.6 billion in 2023 highlights its strategy of scaling SaaS companies through both operational improvements and follow-on acquisitions.

In September 2023, Cisco announced its $28 billion acquisition of Splunk, a leader in cybersecurity and observability software. This deal is aligned with Cisco’s strategic focus on expanding its cybersecurity capabilities and deepening its presence in cloud observability. Cisco aims to leverage Splunk’s expertise to enhance its offerings in security and operational resilience across diverse enterprise environments. The all-cash transaction reflects Cisco’s commitment to securing high-value software assets to accelerate its transformation into a more software-centric, recurring-revenue business model.

In 2021, Insight Partners led the IPO of Monday.com, a leading work operating system (Work OS) provider. Insight has also been involved in acquiring other fast-growing SaaS companies like Qualtrics and JFrog, further solidifying its portfolio in the SaaS space.

These strategic buyers and private equity firms are competing fiercely for quality SaaS companies, particularly in the middle markets. This creates significant M&A opportunities for SaaS company founders in these segments, whether seeking strategic exits or growth capital.

The M&A landscape for SaaS companies is highly competitive, and buyers are becoming more discerning. Companies must demonstrate not just growth potential, but also a solid product-market fit, customer retention strategies, and the ability to scale efficiently. By aligning with the right buyer, whether a strategic acquirer or PE firm, SaaS businesses can achieve their growth objectives or successfully exit at a strong valuation.

Chapter 4

Valuation Drivers & Multiples in the SaaS M&A Market

Despite the macroeconomic challenges, the SaaS M&A market remains highly active, with valuation multiples holding steady, even as interest rates and capital costs rise.

For middle-market SaaS CEOs, understanding the factors that drive valuations—both above and below the average—is key to achieving a successful outcome. Recent trends show that revenue multiples, typically based on ARR (Annual Recurring Revenue), vary widely depending on growth, profitability, and market positioning.

SaaS companies are generally valued on ARR multiples, with factors such as growth rate, EBITDA margins, and market conditions influencing where a company falls within a range. Here are some of the most important value drivers that influence valuations above or below the average range:

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GREM (Growth Rate + EBITDA Margin)

GREM, a weighted metric combining growth rate and EBITDA margin, is a critical health test for SaaS companies. Investors typically prioritize growth over margin, as fast-growing companies can scale more efficiently. For example, if your ARR growth rate is 35% and your EBITDA margin is 20%, you would add these together giving growth rate two times the weighting. A higher GREM score significantly increases the likelihood that a business will command a premium multiple during a market process. Generally, companies with GREM scores above 50% are considered “very healthy” and often see premium valuation multiples above the typical 3-5X range. On the other hand, a GREM score below 30% may push a company toward the lower end of the range, as it indicates either lower growth or weak profitability.

Why Multiples Have Not Declined

Despite economic pressures, multiples for SaaS companies have remained relatively stable. The perception of lower multiples may stem from the fact that many deals in 2021 involved software companies with significantly higher GREM scores compared to those in 2022 and 2023. In reality, current multiples may be higher than historical averages. This stability is partly driven by an imbalanced supply-demand curve, with an unprecedented backlog of capital—often referred to as ‘dry powder’—that private equity firms are eager to deploy. As of mid-2023, global private equity dry powder reached a record $2.49 trillion. This means that competition for high-quality assets remains fierce, particularly for SaaS companies with strong growth and retention metrics, keeping valuations strong. Even though growth rates have slowed across some segments, high multiples are still being paid for companies with premium metrics, especially those that can demonstrate robust expansion potential.

Retention as a Key Driver of Valuation

Retention, both gross and net, is a critical factor in determining SaaS multiples. Gross Retention measures a company’s ability to keep its existing customer base, typically expressed as a percentage of retained customers or units. Higher gross retention, especially above 90%, signals that the company is minimizing customer churn, contributing to operational stability. Net Revenue Retention (NRR), on the other hand, reflects a company’s capacity to not only retain customers but also grow revenue from them, incorporating upsells and cross-sells. NRR above 120%, which indicates a growing revenue base from existing customers, is particularly appealing to investors, as it shows the company’s ability to deepen customer relationships and expand its share of wallet. Conversely, companies with low gross retention or NRR, or with high churn rates, tend to command lower multiples due to concerns about long-term revenue sustainability.

Impact of Vertical Focus, AI Trends and Addressable Market

Vertical SaaS companies serving highly specialized industries, such as healthcare or fintech, tend to command higher multiples, typically ranging from 6 to 10X ARR, depending on their defensible niche and growth potential. Recent trends show that SaaS companies that have successfully integrated AI and machine learning into their platforms—particularly in areas like predictive analytics and automation—can fetch even higher premiums, with multiples reaching 10 to 15X ARR, as AI continues to be a key value driver in the market.

However, it is important to note that not all SaaS companies with high retention and AI capabilities will see such multiples if their total addressable market (TAM) is limited. Niche players serving small markets may struggle to achieve premium valuations, even with strong technology and retention metrics, because the potential for growth is constrained and or is unproven. Companies operating in larger, scalable markets with ample growth potential are more likely to attract higher multiples due to the opportunity for significant expansion.

Usage-Based Pricing Models

Another trend boosting valuations is the shift to usage-based pricing models, where customers pay based on actual consumption. This model aligns revenue with customer growth, creating a more predictable and scalable business. SaaS companies utilizing this pricing approach are seeing multiples trend toward the 6 to 10X ARR range, provided they can demonstrate consistent adoption and revenue expansion from existing customers. The higher multiples stem from the predictability of recurring revenue, as usage-based models reduce churn risk by allowing customers to scale their consumption based on need, fostering long-term customer relationships and increasing lifetime value.

While these multiples provide a general guideline, it’s important to note that each company’s valuation is influenced by a variety of factors, including customer acquisition cost (CAC), customer concentration, management team, and overall market positioning. Understanding how your company scores on metrics like GREM and NRR, and aligning your business with the market’s growth drivers, will be crucial in securing a strong valuation in today’s competitive SaaS M&A landscape.

Key Factors Influencing SaaS Valuations:

ARR (Annual Recurring Revenue). ARR is one of the most critical metrics for SaaS companies, as it provides a clear view of predictable, recurring revenue, which is highly valued by buyers and investors. The size of your ARR serves as the lens through which other key metrics, like retention, growth, and scalability, are evaluated, shaping overall business valuation and investment appeal.

GREM (Growth Rate + EBITDA Margin). The GREM metric (combining revenue growth and profitability) is essential in determining whether a SaaS business can scale efficiently while maintaining strong margins. Middle market companies with a GREM scores above 50% are typically viewed as high-quality targets.

Revenue Growth Rate. High growth rates, particularly sustained ARR growth of 30% or more year over year, signal strong market demand and scalability, which can drive higher multiples.

Net Revenue Retention (NRR) and Gross Revenue Retention (GRR). High NRR (above 120%) demonstrates a company’s ability to retain customers while expanding within its existing customer base, signaling healthy upsell and cross-sell potential. GRR shows the ability to maintain customer relationships without churn, another important factor for valuation.

Customer Concentration. Buyers prefer a well-diversified customer base to mitigate risk. High customer concentration (e.g., over 10%-20% of revenue from one client) may lower valuation due to over-reliance on a single client.

CAC (Customer Acquisition Cost) to LTV (Customer Lifetime Value) Ratio. For certain businesses, a favorable CAC to LTV ratio (e.g., 1:3 or better) shows that a company can efficiently acquire customers while generating long-term value, making the business more attractive.

Market Position and Competitive Differentiation. Companies with a strong market position, brand recognition, or differentiated product offering—such as through AI, automation, or vertical-specific solutions—tend to attract higher multiples.

Addressable Market (TAM). SaaS companies with large, scalable total addressable markets (TAM) often command premium valuations due to their growth potential. A bigger TAM signals broader market opportunities, making these businesses more attractive to investors. Conversely, SaaS companies in niche markets may see lower multiples as their growth is constrained by a limited customer base, even if other metrics are strong.

Vertical Focus (e.g., healthcare, fintech, legal). Vertical SaaS companies serving niche industries with specialized, tailored solutions can command premium valuations due to high barriers to entry and strong customer loyalty as long as the TAM provides a strong runway for growth.

Leadership Team and Technical Expertise. The experience and expertise of the leadership team, especially in scaling a business, play a critical role in driving value. A seasoned team with deep technical expertise and market knowledge is a significant asset.

Product Innovation and Roadmap. Buyers look for SaaS companies with a robust product roadmap, particularly those integrating cutting-edge technologies like AI, machine learning, and data analytics into a mission critical solution.

Customer Contracts and Revenue Visibility. Long-term, contracted revenue with high visibility into future earnings is a strong positive factor, as it reduces uncertainty and provides stability for buyers.

Quality of Financial Statements. Accurate, transparent, and well-organized GAAP financials are crucial for SaaS businesses, especially when preparing for a sale or investment. Proper revenue recognition is key to presenting a clear view of MRR (monthly recurring revenue), ensuring that recurring and non-recurring revenue streams are correctly accounted for. Clean financials, with a clear distinction between these revenue types, are essential when presenting historical and proforma financials to prospective buyers or investors, as they reflect the true stability and growth potential of the business.

Cash Flow and Profitability. While growth is prioritized, free cash flow and EBITDA margins are also scrutinized. SaaS companies that have a clear path to profitability or are already cash-flow positive can see higher multiples.

Scalability and Technical Debt. Buyers will assess the company’s ability to scale without significant technical limitations. Companies with high technical debt or platform limitations may see lower valuations.

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Chapter 5

Factors that Drive SaaS Business Owners to Pursue an M&A Transaction

Every SaaS founder’s decision to pursue a sale or M&A transaction stems from a unique combination of personal and professional considerations. Whether you’re eyeing a full exit, seeking liquidity, or looking to bring on a strategic partner, the motivations behind an M&A process can vary. Below are some of the key factors that often drive SaaS founders to consider an M&A transaction:

Favorable Market Conditions. With SaaS valuations remaining robust, especially for companies with strong ARR growth and retention metrics, many founders see an opportunity to capitalize on the favorable market environment. If your SaaS company is experiencing high demand or has secured a competitive edge in the market (e.g., operationally embedded or vertical-specific solutions), now might be an ideal time to maximize your company’s valuation by pursuing a sale.

De-risking through a Minority or Majority Recapitalization. If you want to reduce personal financial risk without fully exiting the business, pursuing a minority or majority recapitalization can be an attractive option. By selling a portion of your equity to a financial or strategic investor, you can achieve liquidity and diversify your wealth, while still retaining a stake in the company’s future upside. This approach allows you to take cash off the table, reducing risk while keeping skin in the game to benefit from future growth.

Raising Growth Capital. As your SaaS company scales, you may need additional capital to fund product development, market expansion, or customer acquisition. Rather than selling the business outright, you could explore raising growth capital from private equity or venture capital firms. This infusion of capital can accelerate your company’s growth, provide resources for expansion, and support scaling operations without requiring a full exit. Many SaaS companies raise growth capital in preparation for an eventual strategic sale or IPO.

Replacing Early-Stage Investors. For many SaaS businesses, early-stage investors—such as venture capital firms or angel investors—may be looking to exit their positions as the company matures through a market process. Founders often pursue a recapitalization or M&A transaction to bring in new growth-focused investors, providing liquidity to the original investors while securing fresh capital and strategic partners to fuel the next phase of growth. This process allows you to realign your investor base with the company’s current goals and long-term vision.

Desire for Liquidity. For many founders, the SaaS business represents a substantial portion of their personal net worth, creating significant financial exposure. Selling a majority or minority stake in the business can provide liquidity, allowing you to diversify your personal finances while still retaining an equity position. Achieving liquidity is a common goal for founders looking to reduce risk, plan for the future, or reinvest in other ventures or personal endeavors.

Burnout and Scaling Challenges. Leading a high-growth SaaS company can be both rewarding and exhausting. As your business scales, managing the demands of a larger team, product innovation, and operational complexities can lead to burnout. If the pressure of managing day-to-day operations or continued growth has become overwhelming, you may consider selling the business or bringing in a strategic partner to share the load and reduce your involvement.

Strategic Exit to Capitalize on a Competitive Edge. Many SaaS businesses have developed unique competitive advantages—whether through proprietary technology, industry-specific solutions, or strong customer relationships. If your SaaS company holds a differentiated position in the market, selling to a larger strategic acquirer could unlock synergies and maximize the value of your innovation. This type of strategic exit can also allow your product to scale more quickly under the umbrella of a larger enterprise with complementary offerings.

Retirement or Personal Life Goals. As you approach retirement or want to focus more on personal pursuits, selling your business could provide the financial security you need to step away from daily operations. Many founders choose to exit the business when the company is at its peak, ensuring a high valuation and smooth transition while they move on to the next chapter in their lives.

Health Considerations. Running a SaaS company—especially during periods of high growth—can be physically and mentally demanding. If you’re facing health challenges or want to prioritize personal well-being, selling your company or stepping back from day-to-day leadership can help you focus on your health while realizing the financial rewards of building a successful business.

Other Business Ventures. Many SaaS founders are serial entrepreneurs, always seeking the next big idea or venture. If you’re eager to start a new business or invest in a new project, selling your current SaaS company can provide the capital and freedom to pursue new opportunities. This is a common motivation for founders who see their company as a stepping stone to future ventures.

Economic Conditions and Market Timing. While SaaS businesses often fare well in uncertain economic climates due to their recurring revenue models, broader economic factors can still influence decision-making. Rising interest rates, inflation, or global instability may prompt some founders to consider selling before market conditions change or affect growth prospects. Although economic concerns can impact the M&A landscape, selling during a period of high demand for SaaS businesses can help founders secure favorable valuations.

Investor or Co-Founder Disputes. For SaaS founders with multiple stakeholders, disagreements over strategy, direction, or operational control can become significant pain points. In cases where conflicts arise among co-founders or investors, pursuing a sale or recapitalization can be a way to resolve these tensions and realign the company under new leadership.

In conclusion, SaaS business owners pursue M&A transactions for a wide variety of reasons—from personal considerations like burnout or health, to financial motivations like achieving liquidity or replacing early-stage investors. Whether you’re looking to fully exit the business, bring on a strategic partner, or raise growth capital, aligning your decision with the right market conditions and strategic objectives is key to maximizing value and achieving your goals.

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Chapter 6

What Buyers Look for in a SaaS Target Business

Regardless of the economic climate or overall market trends, investors consistently seek out top-tier SaaS businesses that offer strong growth potential and the ability to generate high returns. When evaluating a SaaS company, both strategic acquirers and private equity firms consider a variety of key factors to determine the attractiveness and value of the business. Below are the primary characteristics that buyers look for in a SaaS target:

Revenue Growth and Financial Performance

Financial performance is paramount for SaaS buyers, and companies that can demonstrate consistent ARR growth, profitability, and strong unit economics are highly attractive. One increasingly important metric for buyers is GREM (Growth + EBITDA Margin), which combines the company’s revenue growth rate with its profitability (EBITDA margin). Generally, SaaS businesses with a GREM score above 40-50% are considered very healthy, as this indicates a balanced ability to grow while maintaining profitability.

While fast-growing SaaS companies are highly sought after, investors also value businesses that can scale efficiently. If a company is growing at 30% or more while maintaining positive EBITDA margins, it signals a strong financial foundation. Conversely, if the business is sacrificing margins for growth, the GREM score can provide a more balanced view of its overall financial health. Buyers want to ensure that growth is not coming at the expense of sustainable profitability.

Additionally, predictable and recurring ARR, low churn, and high gross margins make SaaS businesses particularly attractive. Buyers place significant emphasis on the ability to achieve long-term, scalable growth, and financial metrics like CAC-to-LTV ratios, gross margins, and free cash flow are also key factors in the evaluation.

Net Revenue Retention (NRR)

A high NRR rate (often above 120%) signals to buyers that the company is not only retaining customers but is also expanding its business within its existing customer base. This is a critical metric for SaaS businesses because it reflects the ability to upsell and cross-sell effectively. Companies with strong NRR are viewed as having a solid growth engine and long-term revenue stability, which significantly boosts valuation.

Market Position and Differentiation

Buyers are drawn to SaaS businesses that have a strong market position, either as a market leader or as a niche player with a differentiated offering. Whether through proprietary technology, industry expertise, or unique product features, companies with clear competitive advantages are seen as lower-risk investments with high upside potential. Strategic buyers are particularly interested in businesses that offer complementary products or services that enhance their existing offerings.

Scalability and Growth Potential

Investors look for SaaS companies with proven scalability, as well as clear opportunities for future growth. This could involve expanding into new geographies, entering new vertical markets, or broadening the product suite. SaaS companies that have built a scalable infrastructure—whether through robust cloud architecture or an agile product development process—are more likely to attract higher multiples. Companies that demonstrate operational efficiency while scaling (e.g., with low customer acquisition costs and a high LTV/CAC ratio) are especially attractive to buyers.

Technology Strength and Innovation

SaaS buyers pay close attention to the strength of a company’s technology, including its architecture, integrations, and security. Businesses with a modern tech stack, innovative features (such as AI-driven capabilities), and a clear product roadmap are viewed more favorably. Additionally, proprietary intellectual property (IP), such as unique algorithms or specialized data assets, can significantly increase the company’s value. Strategic buyers often seek out companies whose technology can be integrated into their own platforms to enhance their product ecosystem.

Customer Retention and Churn Rates

High customer retention and low churn rates (typically below 10%) are essential indicators of product-market fit and customer satisfaction. SaaS businesses with sticky products that customers rely on for critical operations are more attractive to buyers. Buyers will look at the company’s customer base, contract lengths, and any recurring revenue that is locked in through long-term agreements. High retention rates signal that the business is sustainable and has predictable revenue.

Management Team and Leadership

Investors value a strong and experienced management team that can drive the business forward post-transaction. For private equity buyers, who often keep the management team on board, the expertise and track record of the executive team are crucial. Buyers look for leadership that understands the market, has a clear growth vision, and can navigate the challenges of scaling. Founders and management teams with a history of successful exits or company growth often add significant appeal to the acquisition.

Synergy Opportunities for Strategic Buyers

Strategic buyers are always looking for opportunities to leverage synergies between the target company and their existing business. Whether through complementary technology, customer base expansion, or cross-sell opportunities, the ability to integrate the SaaS business and drive additional growth is key. Strategic buyers are particularly interested in acquiring businesses that fill gaps in their current offerings or provide access to new markets.

Predictable Cash Flows and Profitability

Although SaaS businesses often prioritize growth over profitability, predictable cash flow and a clear path to profitability are important for financial buyers. Private equity firms, in particular, want to ensure that there is a strong return on investment (ROI) within a defined time frame. Companies with high margins and efficient cost structures provide reassurance that they can continue to grow without burning excessive capital, making them attractive targets for financial buyers who plan to exit at a higher valuation in the future.

High ROI and Exit Potential

Private equity firms and financial buyers prioritize companies that can provide high returns within a relatively short investment window (typically 3-7 years). SaaS businesses that have a strong growth trajectory and can be positioned for a future exit—either through a sale to a strategic acquirer or an IPO—are particularly attractive. These buyers will focus on companies with scalable models and high ARR growth potential that can deliver significant value appreciation over the holding period.

Chapter 7

Key Considerations for SaaS Businesses Preparing for a Sale

Are your financials in order?

Buyers will thoroughly scrutinize your financial statements, so it’s crucial to ensure they are accurate, current, and properly documented. This includes having investor-ready income statements, balance sheets, and cash flow statements. For SaaS businesses, ensuring you follow GAAP revenue recognition standards is critical, particularly with regard to deferred revenue and subscription billing cycles. Investors will also expect detailed MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) figures, broken down by customer segment, churn, and upsell metrics.

How strong is your recurring revenue?

For SaaS businesses, recurring revenue is the most attractive asset for buyers. Investors will focus on the strength and sustainability of your ARR, as well as NRR (Net Revenue Retention) and churn rates. Buyers prefer companies that have diversified their customer base to mitigate the risk of over-reliance on a few large customers. SaaS companies with enterprise clients on long-term contracts or a healthy mix of SMB and enterprise customers will be especially attractive, as these factors reduce revenue volatility.

Are your customer contracts solid?

In the SaaS space, the strength of your subscription agreements with customers is paramount. Buyers will prioritize businesses with multi-year contracts, automatic renewals, and favorable cancellation terms (e.g., long notice periods or early termination fees). Be sure that your contracts are transferrable to new ownership without complications and that they contain clauses that allow for potential price increases or upselling opportunities.

Are your operations running efficiently?

Buyers appreciate SaaS businesses that have optimized their operations, whether through automation, streamlined customer onboarding, or low-touch support models. SaaS companies that utilize automation tools to improve efficiency (e.g., automated billing, customer engagement platforms, and AI-powered customer success solutions) are viewed more favorably because these systems reduce overhead while improving scalability and customer satisfaction.

Are there any legal or compliance obstacles?

Legal due diligence is a critical phase of any M&A transaction. Buyers will review all aspects of your business, including intellectual property (IP) protection, software licenses, data privacy policies, and any pending or past litigation. SaaS companies handling sensitive customer data must ensure compliance with regulations like GDPR or CCPA, and buyers will want assurances that your data security and privacy protocols are robust and up-to-date. Be proactive in resolving any legal or compliance issues that could slow down the transaction process.

Do you have key-man risks?

In SaaS, where expertise and innovation often reside with key employees or founders, key-man risk is a major concern for buyers. If your company’s technology or strategic vision is heavily reliant on a few individuals, you’ll need to have measures in place—such as employment contracts, incentive plans, or non-compete agreements—to retain these key team members post-transaction. Buyers will also want to see that you’ve built a sustainable leadership team and that no single person is indispensable to the company’s ongoing success.

Is your technology competitive?

In the fast-evolving SaaS landscape, your technology must be scalable, secure, and up to date. Buyers will evaluate whether your platform has a modern tech stack that allows for future enhancements. Additionally, buyers will assess whether your software architecture can scale with growth and handle enterprise-level demands, making sure that technical debt or outdated systems won’t hinder future expansion.

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Chapter 8

How to Raise Capital for Your SaaS Business

If selling your SaaS business isn’t your primary goal, raising capital can be an effective way to fund growth initiatives, scale operations, or tap into liquidity. Whether you’re looking to accelerate product development, expand into new markets, or diversify your personal wealth, additional capital can provide the resources needed to achieve your goals.

When raising capital, there are two main options: debt and equity. Deciding which path is best for your SaaS company depends on understanding how each option works, the potential impact on your business, and your strategic objectives.

Types of Capital Investors

Debt Capital

Debt capital remains an attractive option for SaaS companies, particularly as interest rates, while high, are often still considered cheaper than equity financing. Additionally, there has been a rise in non-dilutive capital options provided by private equity funds, offering solutions for growth or even to recapitalize and buy out existing investors—achieving many of the same goals as minority equity, without diluting ownership. This type of financing is particularly useful for companies seeking to scale or transition without giving up control.

SaaS businesses can also use debt strategically when acquiring other companies. By leveraging the combined cash flows of both businesses, they can often take on considerable debt, which is typically more advantageous than equity dilution. This type of financing may come in the form of non-bank debt or other non-dilutive financing structures. The recurring and predictable nature of ARR makes SaaS companies especially attractive to lenders, as they can reliably service the debt.

Despite the higher interest rates, debt can still be favorable for companies with strong ARR and low churn rates because it allows them to retain equity while accessing growth capital. As always, demonstrating consistent cash flow and the ability to service debt obligations is crucial to qualifying for this kind of financing.

Equity Capital

Equity capital involves selling a portion of ownership or diluting ownership in your business to outside investors in exchange for capital. For SaaS companies, equity financing is often used for long-term, strategic needs, such as funding product development, entering new markets, or acquiring complementary technology.

Equity investors—such as venture capital firms, private equity firms, or strategic investors—typically focus on high-growth companies with scalable business models. SaaS businesses with strong ARR growth, high Net Revenue Retention (NRR), and a large Total Addressable Market (TAM) are especially attractive to equity investors. However, the downside of equity financing is the dilution of ownership, as you give up a portion of control over decision-making and future profits.

While equity financing doesn’t require immediate repayment, investors will expect a substantial return on their investment within a few years, usually through an eventual exit, such as a sale or IPO. Additionally, taking on equity investors can bring strategic value beyond capital, as many venture capitalists or private equity firms offer operational expertise, market connections, and guidance that can help scale your SaaS company faster.

Choosing the Right Form of Capital for Your SaaS Business

The decision between debt and equity capital will depend on several factors, including your company’s stage of development, financial health, and long-term goals.

Early-Stage SaaS Companies. For early-stage SaaS companies with little or no profit, equity financing is often the most viable option. Without consistent cash flow to service debt, taking on investors allows you to fund growth initiatives without the burden of loan repayments. Equity investors are also more likely to invest in the company’s vision and potential, understanding that early-stage businesses prioritize growth over profitability.

Growth-Stage SaaS Companies. If your SaaS business is more mature, with consistent ARR and a clear path to profitability, you may have more flexibility. Debt financing could be a good option to fund specific growth initiatives while retaining full ownership and control of the business. However, if you’re looking for a partner to help accelerate scaling, an equity investor who brings strategic value—such as industry expertise or customer connections—might be the better choice.

Balancing Liquidity and Growth. If your goal is to tap into liquidity while maintaining control over your SaaS business, you might consider a minority equity investment or a recapitalization. This approach allows you to sell a portion of the company to gain personal liquidity or fund specific growth initiatives, while still retaining control over major business decisions. For founders looking to diversify their wealth but remain involved in the business, a minority recap can strike a balance between liquidity and continued growth.

Navigating the Capital-Raising Process

Raising capital can be a complex process, especially in the competitive SaaS landscape. To optimize your capital structure and find the best partners, consider working with an investment banker or financial advisor experienced in the SaaS industry. Your advisor will help you assess your funding needs, identify the right capital sources, and negotiate terms that align with your business goals.

Whether you choose debt or equity, it’s crucial to have a clear plan for how the capital will be used to drive growth, scale operations, or increase the value of your company. Investors will want to understand your growth strategy, product roadmap, and how you intend to generate returns on their investment.

Chapter 9

How Forbes Partners Can Help

Despite economic fluctuations in recent years, it remains an opportune time for exceptional SaaS companies to consider entering the market. The SaaS sector continues to attract interest from both strategic buyers and private equity firms, given its scalable business models, recurring revenue, and long-term growth potential. Investors are eager to deploy capital into top-tier SaaS businesses that offer high returns and are well-positioned for continued success.

The Forbes Partners investment banking team excels at navigating dynamic M&A markets, with deep expertise in the SaaS industry and a strong understanding of the trends driving SaaS adoption. We maintain close relationships with many of the industry’s most active buyers and investors, so we know exactly what they are looking for in a target company. Whether you’re seeking to sell your SaaS business or raise capital for growth, our team can provide direct access to the right buyers or investors who align with your strategic goals.

Deep SaaS Expertise and Proven Success

At Forbes Partners, we specialize in working with SaaS businesses that operate on recurring revenue models, from high-growth startups to mature, established companies. Our investment banking team has extensive M&A and capital formation experience in the SaaS and broader technology sectors, and we understand the unique challenges and opportunities that SaaS businesses face at different stages of growth.

Our team has successfully helped SaaS companies achieve optimal outcomes by creating a compelling narrative around their market positioning, product differentiation, and long-term growth potential. We coined the term GREM and adopted a weighted formula that more strongly correlates with valuation multiples. We also understand the importance of key SaaS metrics such as ARR (Annual Recurring Revenue), Net Revenue Retention (NRR), and churn rates, which are critical to positioning your company as an attractive target for buyers and investors.

A key member of our SaaS advisory team, Dan Pellegrino, has extensive hands-on experience building and growing technology companies. Dan has founded, scaled, invested and sold multiple software and technology businesses. His broad operational knowledge, and deep insights into what drives value for recurring revenue business models provides invaluable insight into how SaaS companies function and how buyers assess acquisition opportunities in this space. For more information, please download our SaaS Value Drivers Overview white paper.

Crafting Your Strategic Story and Positioning for Success

Whether you are ready to sell your SaaS business or looking to raise growth capital, positioning your company to attract the best buyers or investors is key to achieving an optimal outcome. At Forbes Partners, we don’t just connect you with potential buyers; we craft a compelling story that highlights your company’s unique strengths, market position, and future potential. Our team excels at helping SaaS founders articulate their value proposition, competitive differentiation, and scalability, all while addressing key buyer concerns such as customer retention, unit economics, and growth strategy.

For SaaS founders who aren’t yet ready to sell but are looking to position their company for an eventual exit or capital raise, our advisory services can be invaluable. We work with you to optimize your financial metrics, strengthen your customer base, and refine your growth strategy so that when the time is right, your business is ready to command top-tier valuations and attract premium buyers or investors.

Why Partner with Forbes for Your SaaS M&A or Capital Raise?

At Forbes Partners, we understand the intricacies of growing and scaling a SaaS business. Our hands-on operational experience, combined with our expertise in the SaaS M&A market, makes us uniquely positioned to help you navigate the complex process of selling or raising capital for your business. Whether your goal is to achieve a full exit, bring on strategic partners, or secure growth capital, our team will guide you through every step of the process to ensure a successful outcome.

Our approach is tailored to the specific needs of SaaS businesses, focusing on the metrics and growth levers that drive value in this highly competitive sector. With deep industry connections, a strong track record of successful SaaS transactions, and a commitment to achieving the best results for our clients, Forbes Partners is the trusted partner you need to reach your next milestone.

Regardless of where you are in your SaaS journey—whether you’re planning an exit, raising growth capital, or positioning your company for future success—the Forbes Partners team is here to help you achieve the optimal outcome.

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Exceptional companies need an exceptional investment bank. Forbes Partners has the expertise to exceed expectations and achieve optimal outcomes for you.

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Forbes Partners is an award-winning middle market investment banking firm focused on driving maximum value to clients. We partner with business owners of privately held, in-demand companies who deserve exceptional results. Our experienced bankers think strategically about value creation and engage and motivate the right targets to compete. We are market makers, and our clients expect nothing less.