June 06, 2024
Translink Corporate Finance has released its quarterly SaaS (Software as a Service) Valuation Index, summarising performance in FY 2023, with future forecasts based on Q1 FY’24. The Index comprises 136 companies across Europe, the USA, and the rest of the world (RoW). It’s an ideal benchmark for private small-to-mid-market B2B SaaS companies in Europe, with 60% of the sample matching this profile.
In summary:
The SaaS sector, like most other industries, saw deal volumes decline between Q4 FY 2022 and Q4 FY 2023, with transactions down by 29.6%.
However, it seems the market is stabilising following months of abnormal deal volume decline. Volume has been growing for the past two quarters, with 1 166 deals closed in Q4 FY’23 and 1 490 in Q1 FY’24 – an increase of 27.8%. The curve shows SaaS companies are now trading at multiples consistent with the long-term past, recovering from the bubble of 2020 to 2022.
2023 was a year of change, when the market had to adapt to new conditions. For 2024, the Translink CF team remains optimistic with positive signs outweighing the negatives.
Ticking up:
Q4 2023 marks the first uptick trend in deal volume for 7 quarters. Deal volume went up 8,2% in the 4th quarter. The number of deals in the SaaS sector remains far above the average pre-Covid-19 volume.
The revenue multiple has shown signs of stabilisation in the small to mid-market, with a median of 3,4x NTM (Next Twelve Months) revenue in Q4 2023 for our sample, navigating in the 3,4x to 3,9x range throughout the year.
Could it be that sellers and buyers have adapted to the market conditions and valuations?
Market shaping factors:
- We have seen a shift from ‘growth at all costs’ to more sustainable patterns. This was driven by the high cost of growth capital. Mid-year in 2023, 60% of the index’s sample had a LTM (Last Twelve Months) growth rate of +20%, with 12% of the companies covered growing above 50%. By Q4 FY’23, just 40% had a LTM growth rate over 20%, with only 3% of the sample over 50%. Sustainable, self-funded, and cash-flow-driven growth is now a must.
- AI continues its prolific integration in the SaaS sector.
Forecasts for 2024:
- Cash crunch: Serena Capital’s study of +700 SaaS companies showed 70% of SaaS entrepreneurs intend to extend their runway. Additionally, PitchBook shared that the number of enterprise SaaS venture deals fell 32% to 2 764 in 2023, with their value slipping by 33.3% to $72.9 billion. 2023 was the second consecutive year to see transaction volumes and the amount invested decline.
- Strategic buyers: We continue to predict that strategic buyers will play a big role in the SaaS market in 2024.
- Top premiums for quality: Over the past 36 months, buyers have tended to favour quality over quantity, with data pointing to stronger premiums for outperformers. More than ever, buyers are paying a higher premium for quality assets.
- Safer business models: Rapid growth still matters to attract interest and valuation premiums, but buyers are looking for ‘safer bets’ with sticky offerings and solid business models.
- High price to go private: PEs and strategic bidders are paying high premiums to take their top targets private, which may indicate the stock exchange isn’t perfectly valuing SMID SaaS listed companies.
Geopolitical players:
In 2023, Europe surpassed the USA, with more active dealmaking volumes. Deal volume decline remains highest in the USA than in the EU or RoW. However, USA SaaS companies still trade at higher multiples compared to Europe and RoW.
The future is probably brighter:
In Q1 2024, SaaS companies that exceeded a R40 threshold above 60 traded at an average premium of +207% compared to underperformers. This premium has grown significantly from Q4 2023.
The best performers are strongly building on their reliability, with a clear vision of the future, to attract investors.
The SaaS M&A market is not entirely in decline. While it has faced overall challenges and witnessed a shift in focus, companies that manage to adapt and outperform the market could open massive opportunities. With our deep expertise and expansive global footprint, Translink experts can partner you to get the deal done.
Read our full report for all our insights into the SaaS market : https://translinkcf.com/reports/translink-cf-saas-valuation-index-q4-fy23-q1-fy24/
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