For founders and executive operators of middle-market businesses with recurring revenue models like Software as a Service (SaaS), achieving a successful exit hinges on demonstrating business sustainability. For founders and executive operators of middle-market businesses with recurring revenue models like Software as a Service (SaaS), achieving a successful exit hinges on demonstrating business sustainability. Your true enterprise value is defined by how effectively you retain and expand revenue from your existing customer base.
Gui Carlos, Principal at Walden M&A, a specialist in sophisticated software transactions, affirms one metric is paramount for qualified institutional buyers: Net Dollar Retention (NDR), also known as Net Revenue Retention (NRR). This figure is a non-negotiable indicator of a company’s operational stability, revenue predictability, and future scalability. At Walden M&A, our investment banking-level approach involves deep stress-testing of this metric because a high NDR is definitive proof a business is a predictable, high-margin, perpetual growth engine capable of supporting institutional investment.
NDR: The Cornerstone of Durable Growth
Sophisticated investors prefer NDR over simpler metrics like Annual Recurring Revenue (ARR) alone because it provides a more complete assessment of growth sustainability. A focus solely on new customer acquisition (ARR) ignores the vital factors of customer churn and revenue contraction.
Carlos highlights its strategic importance, explaining why investors prioritize NDR: “Why is Net Dollar Retention a key point? It is simple, investment in a SaaS company is typically focused on growth (new clients), the investor see churn as a hole in the bucket they are pouring money into. A NDR below 100 is the same thing, but a NDR of 100 means there is no hole, and above that it’s like what you put in the bucket actually compounds and grows naturally.”
NDR consolidates the entire commercial lifecycle into a single, comprehensive metric. It captures the three critical revenue movements within a fixed cohort of customers:
- Expansion Revenue: Upsells and cross-sells.
- Contraction Revenue: Downgrades.
- Churn: Logo loss.
NDR captures the efficacy of a business’s operational and commercial strategy, making it a powerful and reliable predictor of future financial performance for institutional buyers.
100% NDR: The Threshold for Institutional Capital
In M&A due diligence, an NDR figure dictates a company’s perceived risk profile. This metric is the critical threshold proving a business possesses an inherent growth engine, capable of increasing recurring revenue without acquiring a single new customer. This financial durability identifies the business as a low-risk asset with a predictable minimum cash flow.
Here is how the metric signals risk to an institutional investor:
- NDR Below 100%: This signals a structural revenue deficit. The loss from churn and contraction exceeds the gain from expansion. This compels the company to rely on expensive, new customer acquisition merely to maintain size, which is a fundamental drain on margins.
- NDR Above 100%: This is the critical threshold. It proves the business possesses an inherent growth engine. NDR figures exceeding 120% are routinely observed in high-growth companies and are closely aligned with achieving the Rule of 40 (growth rate plus profitability percentage).
Defending Valuation with Proven NDR
A high, validated NDR is the most potent tool a seller has to justify a premium revenue multiple. A sustainable NDR removes perceived risk, which directly translates into higher valuation multiples. For instance, public market data shows companies with NDR above 120% command multiples substantially higher than those below 100%.
At Walden M&A, we utilize this metric to anchor our valuation defense. We present institutional buyers with a data-driven case, often referencing public-market comparables, illustrating exactly how a high NDR justifies the premium multiple. This strategic use of metrics removes emotional subjectivity, ensuring the seller receives maximum value for their asset.
The key enablers allowing you to achieve and sustain a high NDR must be demonstrated to the buyer. This allows the buyer to substantiate the proof of durability. If the NDR of a business grows significantly within a period the reason needs to be analyzed and the period broken down for better understanding.
Carlos uses a relevant example: “If a Private Equity platform company buys a bolt-on company that works like a new module for their SaaS solution, this company will likely increase its NDR for the following year significantly due to upsell of a new product. It can have a long-lasting impact on the NDR, but the impact in the first year will likely be much higher.”.
Operational Enablers for Post-Acquisition Viability
Expansion revenue is a primary value driver, and sellers must demonstrate the operational and sales enablement factors proving this growth is independent of the founder and can continue seamlessly post-acquisition. A buyer’s focus is on the NDR’s long-term, post-closing viability. The non-financial signals confirming a successful transition are centered on critical operational capabilities.
Buyers will investigate trends to substantiate proof of durability by looking at the following key operational drivers:
- Professionalized Customer Success Function: The client base must be managed by a Customer Success team and Account Executives, rather than being dependent solely on the founder-owner. This professionalization of the relationship lifecycle is a signal of stability and scalability.
- Metrics-Driven Usage & Stickiness: Key Performance Indicators (KPIs) show intensive usage, such as time spent on the software or product dependency, directly correlating with low churn and high product stickiness.
- Embedded Upsell Capabilities (Modular Product Architecture): Technical documentation must confirm the software is designed to facilitate easy upsells of additional features or capacity, thereby embedding the “expand” motion into the product itself.
- Defined Upsell Playbooks: The process for identifying, qualifying, and executing expansion sales must be codified into organizational playbooks. This guarantees knowledge transfer and operational continuity for the buyer.
- Process Maturity: The business must have its systems organized, playbooks built, and processes defined professionally. This infrastructure ensures continuity and prevents the loss of crucial information after the transaction.
- Segmented Analysis: Buyers expect NDR analysis broken down by different customer clusters (size, vertical, product line). This allows them to accurately forecast and strategically focus post-acquisition, as a poor NDR in one cluster might be masked by a strong one in another.
- Founder Independence: If a high percentage of revenue is concentrated in key accounts, the seller must have a clear plan for transferring those relationships from the founder to the professional account management team. The relationship cannot be entirely dependent on the founder exiting the business.
In M&A, preparation equals confidence. Investing resources into organizing, measuring, and professionalizing the factors driving Net Dollar Retention drastically reduces friction in due diligence, eliminates information asymmetry, and positions the business to achieve the optimal enterprise value at closing.
If your business features a recurring revenue model and you are ready to explore your M&A options, the Walden M&A team is here to help. Contact us to schedule a consultation.