Utilizing a revenue-based multiple for valuation?

searcher profile

November 19, 2020

by a searcher in Los Angeles, CA, USA

I am evaluating an opportunity in the SaaS space and the broker and owner are seeking a revenue-based multiple. The company is small (sub $4MM in rev), but has had very good growth and ebitda margins over the last three years. There is a recurring revenue model in place, low churn, and opportunities to expand the business. A revenue-based multiple yields a much higher enterprise value (double of what my EBITDA-based multiple would have yielded), and as such leveraging the business with senior debt would not be the structure I would go with. Wondering if folks in the community have utilized revenue-based multiples in the lower middle market and how they have moved forward with the structure? Thanks!

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commentor profile
Reply by an investor
from University of Pennsylvania in Washington, DC, USA
I've had 3X exits in SaaS space - happy to help redacted or DM). It's normal that SaaS business trade on revenue multiple and generally do with PE buyers. That's why they can be tricky to pull off with search and have to be creative with structure to get a deal done. I'd also make sure to look at cash flow - great SaaS business have awesome cash flow because many get annual contracts paid up-front (but others are more monthly billing that has more issues).
commentor profile
Reply by a searcher
from The University of Chicago in Chicago, IL, United States
At the end of the day, the business needs to produce cash. This is especially the case when you use leverage to purchase a business as you will need cash flow to make debt payments
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