The dynamic world of technology mergers and acquisitions includes a diverse range of buyers, each with specific investment needs. Among these, specialized acquirers known as vertical market software consolidators stand out as a notable acquirer of Software as a Service (SaaS) and technology-enabled businesses. Gui Carlos, a Principal at Walden M&A with a specialized focus on technology transactions, offers insight into this unique segment of the M&A market and the specific considerations for SaaS founders looking to sell.
Understanding Vertical Market Software Consolidators
Vertical software consolidators (VSC) are typically large, well-capitalized companies whose core business involves acquiring a portfolio of smaller, niche software firms. They actively raise capital to systematically acquire smaller, often founder-owned software firms. Carlos identifies Constellation Software as a prime example, calling it “the largest buyer of SaaS companies in the world”, but there are many others like Valsoft, Dura Software, and Banyan Software.
These consolidators primarily target bootstraped businesses, meaning they have generally not received venture capital (VC) funding. Carlos explains a key reason for this preference, noting “VC-backed companies often come with high valuation expectations and complex liquidation preference terms. If a company does not achieve explosive growth, a founder could find their returns heavily impacted by these preferences if sold at a lower multiple”.
The typical seller to a vertical market software consolidator is a founder, often over 40 years old, who has built significant wealth within their company’s shares, sometimes 80-90% of their total assets. These founders often seek liquidity but also wish to remain involved with their company. “A lot of times these founders do not want to stop working,” Carlos highlights. “They really like what they do, but they want to put some money in their pockets”.
Advantages for Sellers in a VSC Transaction
Selling to a vertical software consolidator offers distinct advantages, particularly in terms of post-acquisition operations and transaction certainty.
- Operational Continuity: A primary appeal for many founders is the stability offered. “The day-to-day remains the same for most VCS transactions,” Carlos observes. These acquirers frequently “keep the team, and keep the founder for quite a few years,” minimizing disruption to the existing workforce and established processes.
- Financial Stability and Reduced Risk: Consolidators are typically well-funded with committed capital for acquisitions, providing a stable financial foundation and mitigating risk. This means they do not need to approve the business with banks before being able to do this transaction, or raise capital with LPs like Search Funds, making the sale process more streamlined and less risky. Sellers generally face less concern about receiving payment, as these buyers typically avoid risky “seller financing”.
- Access to a Broader Network: Joining a larger vertical market software group can provide founders with valuable connections. Carlos mentions access to dozens of other founders, facilitating collaboration and the exchange of “best practices and so on,” potentially benefiting the acquired business through shared insights, and maybe impacting the value to be received through earn-outs.
- Earn-out Potential: Although initial multiples may differ from those of strategic buyers, many transactions with vertical software consolidators often include an “earn-out component” as part of the total price. This can add substantial value over time.
From initial engagement to closing a transaction, the typical timeline for a sale to a vertical software consolidator is around nine months, with the period after contacting the consolidator often condensing to six or seven months.
Metrics and Characteristics VSCs Prioritize
When evaluating potential acquisitions, vertical software consolidators scrutinize specific metrics and characteristics unique to software businesses. Carlos emphasizes several key indicators:
- Recurrent Revenue Percentage: “The number one will be the percentage of the revenue is recurrent,” Carlos stresses. If this figure falls below 70%, “the interest goes down very fast”.
- Gross Margin: A lower gross margin (e.g., 60%) can signal reliance on “other people’s technology or a large support team,” impacting scalability and potentially affecting the offered multiple.
- Churn and Net Dollar Retention (NDR): “Churn is always really, really important,” Carlos notes. Net dollar retention, a more complex metric, is also “very, very strong here as well”. A high NDR, particularly above 100%, and even more so above 120%, indicates a strong ability to retain and expand revenue from existing clients, which can significantly “skyrocket” valuations.
- Founder Independence: Consolidators seek businesses with operational stability beyond the founder. They assess the existing team’s capability to manage the business, ensuring a smooth transition. A founder who insists on maintaining absolute control can complicate the sale process.
Addressing Misconceptions and Market Realities
One common misconception among tech business owners involves unrealistic valuation expectations. “The problem is we are always looking into success cases,” Carlos explains, referring to “unbelievably high multiples” seen in technology. He cautions that such high valuations typically apply to companies built for massive scalability, possessing a high addressable market, and robust sales processes.
For niche or vertical markets, valuations tend to be lower. Typically, these companies have lower growth rates but also lower churn rates and higher profitability. Carlos points out these specific markets are why vertical market software consolidators find success: “It is really interesting to buy those companies, you do not need to pay as much, you are rarely going to pay five times, you are never going to pay ten times ARR, you are probably going to do a lot of transactions, around like two and a half to four times ARR”. If the founder has the mindset to exit while keeping the company working in the same way, keeping the team, and also being part of the business after the sale, while having a profitable but not high-growth company, these multiples might give them the value to be able to retire without needing to actually retire.
Walden M&A’s Expertise in Vertical Software Transactions
Walden M&A, with Gui Carlos’s specialized expertise, acts as a critical bridge between vertical software consolidators and technology business owners. Our role involves connecting owners with these specific buyers and, crucially, helping them present their financial data and KPIs in a way that resonates with consolidators. “I am going to be the person who will help them calculate all the metrics and be sure we are providing the right metrics, which typically most people are calculating in a different way than VSC does,” Carlos affirms. Providing accurate, well-formatted information adds substantial value and builds buyer trust. We aim to provide premium information to receive a premium valuation. Carlos’ job also focuses on bringing more than one buyer to the table, so the seller can choose and negotiate better terms.
The M&A deal team for a tech sale still includes attorneys and CPAs, but the volume of unique tech-specific KPIs often extends beyond standard accounting practices. Walden M&A provides this specialized support, collaborating with owners to generate and present all necessary metrics.
Walden M&A’s deep understanding of the evolving market dynamics ensures clients receive forward-thinking advice, positioning their technology businesses optimally for sale.Complete the form below to schedule a consultation with the Walden M&A team and discover how our expanded expertise can benefit your technology business sale.