Uncovering Opportunities in the SaaS Space in 2022

2021 was a year where the world adjusted to the new normal of the COVID-19 pandemic. There are still several places on lockdown, and much of the world faces restrictions, forcing both businesses and consumers to adjust accordingly.

Business owners have always had to be conscious of both macro- and micro-economic factors when planning. With inflationary pressures and increased national debt across most developed nations, many will be making more conservative decisions in 2022 as they expect to bear some of that burden from the government, such as through higher taxes.

In mid-2021, we noted that the US could raise federal tax rates for wealthy investors to as much as 43.4%. While an increase is still likely to happen, offsetting measures such as an increase in the SALT cap for US taxpayers in high-income-tax states like California and New York should help ease some of the burden.

Despite the pandemic, for many in the SaaS industry, business has continued to boom. Acquirers have benefitted from historically low-interest rates and many sellers have opted to exit while the market is strong with growing multiples. Other founders and business owners have opted to grow their business more and deal with an increasing demand for remote/hybrid work, higher salary expectations and more optionality for consumers of SaaS products. This means there should still be a strong supply of excellent acquisition opportunities in 2022 and beyond as the businesses that have survived are stronger than ever.

There has never been a better time in history to exit a SaaS business than today. While we do not have a crystal ball into the future, we expect 2022 to be another strong year, particularly before interest and tax rates are finally increased. At the lower end of the market, individuals are still leaving their jobs to buy businesses and, at the higher end, institutional investors and private equity firms have more capital available than ever before.

In this post, we will explore trends in SaaS, how the micro-and mid-cap SaaS acquisition landscape has changed in the past 6-12 months and what we expect to see soon.

Key Statistics

Invested Capital

The total value of closed deals in 2021 was more than double that of 2020. A large part of this was driven by SaaS which accounted for over 50% of capital invested over the last 12 months.

Available Capital

Buyers in our network represented nearly $39 billion in capital at the end of 2021, with many expressing interest in multiple business models. Most notably, capital in the SaaS industry grew by nearly 50% in 6 months – partly driven by our exposure to larger, institutional buyers seeking 8 and 9 figure deals.

SaaS Buyer Interest Broken Down by Business Model

Of those interested in SaaS, 35% have acquired a SaaS company before, and 87% of our SaaS buyers are looking to make an acquisition within the next 6 months.

Additionally, 43% of our SaaS buyers have quick access to capital (e.g., cash on hand, committed investors, silent partners and other bank financing). In fact, we have 19x as many cash buyers as SBA buyers.

Industry Overview

According to forecasts and analysis of the global SaaS industry, it is expected to grow by $100 billion during 2021-2025. Furthermore, the market’s growth will accelerate at a CAGR of 11.35%.

By 2026, the market size is projected to reach $307 billion, according to a Valuates Report. There are several factors that are influencing this rapid growth. Firstly, SaaS’s broader adoption in the financial and healthcare industries – both infamous for being slow moving with out-of-date systems.

Secondly, this growth has also been spurred by the rise of vertical SaaS. Vertical SaaS has allowed companies to track industry-specific KPIs/pre-defined metrics that have led to industry-specific intelligence – essential for staying ahead for any business.

The effects of COVID-19 on SaaS are also undeniable. The pandemic has brought on a lasting appetite by companies for work-from-home solutions, which in turn has increased investment in cloud-based systems. This has led to increased demand for SaaS, and it helps decrease the need for physical storage and warehousing.

Trends in SaaS

No- and Low-Code Apps

No-code has been a game changer as mobile application usage has increased within the realms of social media, OTT platforms—over-the-top platforms that enable you to broadcast video content over the internet—and entertainment applications used for business.

Many organizations are also beginning to adopt no-code application platforms because of their cloud-based systems. From large FMCG organizations to universities and even tech-based startups, it seems no-code has made life easier for everyone as no-code-apps allow people without any coding knowledge to create a variety of applications including workflows, websites and mobile applications.

According to the latest forecast by Gartner, the surge in remote development during the COVID-19 pandemic will continue to boost low-code adoption, despite ongoing cost optimization efforts. In their report, it was forecasted that the worldwide low-code development technologies market would grow by 23% in 2021. The low-code development technologies market is projected to total $13.8 billion in 2021, representing a 22.6% year-over-year increase.

AI (Artificial Intelligence)

The SaaS industry is continually improving its usefulness with the implementation of AI. This allows for hyper-personalization of applications and client services. AI also permits for automation of repetitive or time-consuming jobs and could potentially solve many challenges that businesses face. Amazon, Google, Microsoft, Oracle and Salesforce have already incorporated AI to strengthen their presence in the SaaS industry.

The integration of AI with SaaS software provides value through automation, personalization and security enhancement to solve complex business problems – a desirable space that many investors want exposure to.

Shift to PaaS

While SaaS might be the most popular cloud service used by businesses, lately there has been more of a shift toward PaaS, or platform(s) as a service.

Although SaaS allows providers to host an application and users to purchase it, SaaS applications generally do not have the ability to be customized. Conversely, PaaS provides users with a framework to build and deploy customized applications based on user preferences.

Furthermore, development, testing and deployment processes are considerably more efficient and simpler for PaaS applications compared to those of SaaS. This effectively follows the trend of no-code apps, where a less technical background is needed to cater applications toward business processes.

Usage-based Pricing

Lately, more SaaS companies have been switching to usage-based pricing. In fact, “charging your customers per-use not only makes your product more affordable and accessible, but also empowers users to only take advantage of the features they need,” according to Baremetrics’ post on usage-based pricing.

With more startups revolving their solutions around automation, AI and APIs, the value is placed on who is logged in—not on the number of software seats that can sign in.

Apps that utilize usage-based pricing often have lower revenue churn than other pricing models – an important variable when it comes to maximizing exit value.

Enhanced Security

Enhanced levels of security and complete transparency are more important in the SaaS industry than ever before. It’s crucial to protect data in transit between clients and the service, as well as within the service.

It is additionally fundamental to protect user accounts by recommending authentication and authorization policies, and to provide logging and auditing to maintain customer experience and flexibility.

By providing enhanced levels of security, customers can feel more comfortable with your SaaS. When your SaaS is effectively implemented and protected, your risk for disruption becomes much more minimal. More protection and control over your SaaS means increased opportunities for growth and expansion.

This is important with institutional buyers and private equity firms – who often have much more legal and financial exposure if there are issues with users of their portfolio businesses being hacked or similar.

Featured Deal: Newor Media

FE International acted as the sole sell-side advisor to Newor Media, a market-leading programmatic ad-management company.

Founded by Ted Mikulski in 2018, Newor Media set itself apart from its competition by working proactively with all publishers to maximize their revenue – something you would not experience with a larger company offering like Google AdSense.

FE International ran a competitive process, secured multiple qualified offers from a variety of strategic and private equity acquirers, and closed the deal above asking price.

Ted Mikulski, the founder of Newor Media, added, “I am super proud of what we’ve built with Newor Media. The business grew rapidly alongside partner Megan Rafferty, far quicker than I could have imagined. We started getting approached by interested buyers about a year before we exited, unsolicited. It was overwhelming and that’s when I knew I needed to work with a professional brokerage.

When we partnered with FE, they got us in front of leading private equity firms and strategics and ran a smooth M&A process from start to finish. I look forward to Newor Media’s continued success under the new ownership of LTV.”

This deal helps demonstrate FE’s ability to close deals across multiple business models – the ad-tech space has elements of both content and SaaS to understand, and whilst technically not falling under either category, FE was still able to get a deal done.

The Latest on SaaS Valuations

The average size of SaaS deals has skyrocketed since 2016, with a significant uptick in average size from 2020 to 2021 as FE has reached more institutional buyers. The extensive capital invested in this space shows that a SaaS business is incredibly valuable and attractive to many potential buyers.

Many metrics come into play when determining a SaaS business’ worth, and at FE International we consider the following, and more, listed below:

• SDE vs. EBITDA
  vs. Revenue
  Multiple
• Age of Business
• Business Stage
• Profitability
• Size of Business
• B2B vs. B2C
• Metrics: Quantity
  of Clients, LTV,
  ARPA, MRR
• Owner Workload
  and Team
• Distribution of
  Plans: Monthly,
  Annual, One-Time
• Churn Rate
• App Store Rating/
  User Reviews

For more specifics on each section, read our post about SaaS Valuations in full.

Investors in the Shopify Ecosystem

Without a doubt, the Shopify ecosystem continues to grow as we see the number of transactions rapidly expanding and selling apps in the Shopify App Store is more lucrative than ever before.

Shopify announced a drastic reduction of their revenue share in 2021, where developers who make less than $1 million in revenue per year only pay 2.9% in processing fees followed by a tiered revenue share—effectively saving them 12.1% from before. This created an overnight valuation bump for all Shopify apps, small and large.

Globally, Shopify claims to have generated 3.6 million jobs and $307 billion in economic impact, and as demand continually heightens, more developers are entering the Shopify space. Shopify’s partner ecosystem generated $12.5 billion in revenue in 2020, and there has also been an expansion in valuations for Shopify applications. The opportunities in this space are plenty and don’t look to slow any time soon—somewhere FE International has deep insights into with its e-commerce and SaaS experience.

We have been seeing more institutional investors entering the Shopify space to buy Shopify apps and similar businesses (such as Atlassian apps). These types of investors include mid-market private equity funds backing operators, lower market private equity funds, high net worth investors and limited partners (LPs)—effectively deploying $50-200 million into the space.

These types of investors are incredibly data-driven, so if you’re hoping to pique their interest, it would be wise to keep an organized documentation of your financials and other relevant business information on hand.

Featured Deal: MyShopManager

FE International was pleased to act as the sole sell-side advisor to MyShopManager, a leading SaaS for auto-dealers which was officially announced in 2021.

Founded by father and son duo Dave and Jon Dickson, their focus for MyShopManager was making sure the business would be attractive and sellable down the line.

In doing so, they were able to build their business with low churn and high MRR growth. Their approach paid off when they decided to exit as they were faced with a variety of potential buyers interested in paying top dollar.

After qualifying interested parties, FE helped the seller navigate through several potential buyers and identified the one that most aligned with the seller’s long-term vision for the business and maximized the possible exit price.

Summary and 2022 Outlook

We have already begun to witness a monumental push towards the SaaS space, and the opportunities therein continue to expand and reveal themselves.

With the shift to PaaS, usage-based pricing, no-code-apps and AI, there are a variety of up-and-coming trends to take advantage of and capitalize on.

If you do decide to explore the world of SaaS as a founder or acquirer (or you’re already in it), it’s important to understand how SaaS valuations work and the trends within the industry.

With over $16 billion of available capital to invest in acquiring SaaS businesses in FE’s current buyer network alone, the space is beginning to mature beyond what we saw when FE was founded over a decade ago. Buyers are becoming savvier, and so are founders and their advisors. We don’t expect to see this trend reverse in 2022.

Despite challenging trading conditions for many businesses, and huge disruption to personal and business travel, we expect the SaaS industry and ultimate exit multiples to continue to grow in 2022.

To take the next step, get a free valuation of your business or get in touch to acquire.