Not all revenue multiples are equal.
99%> of the time EV/ARR multiples should be greater than EV/Forward Revenue multiples, it is therefore very important to understand the difference between the two.
In both of these multiples, the Enterprise Value (EV) remains constant, it is the measure of revenue that is changing. Annualised Recurring Revenue (ARR) is the current Monthly Recurring Revenue multiplied by 12, whereas the Forward Revenue is the total forecasted revenue for the next financial year. Assuming the company is growing, then Forward Revenue will always be higher than ARR and therefore, EV/Forward Revenue will always be lower than EV/ARR.
The relationship between EV/Forward Revenue and EV/ARR is explained by growth. The faster a company is growing the bigger the difference between EV/ARR and EV/Forward Revenue multiples.
Is profitability, or, at least, a path to profitability, becoming more of a factor in valuation multiples for SaaS companies?
Recently there has been considerable coverage of how median valuation multiples have fallen for publicly listed SaaS companies and the impact that this is having on multiples employed by private companies. To add to this debate Clare Capital has analysed the annual change in Forward Revenue Multiple for 73 public SaaS companies.
From this dataset, more than 80% of the companies (60) have experienced a reduction in valuation multiple and as a group the median valuation multiple has fallen by more than a quarter for the annual period (other SaaS commentators have been highlighting even larger declines, for example, see Tomasz Tunguz‘s blog post on the decline in SaaS Valuations).
Following a few twitter conversations between our own Mark Clare, technology commentator & investor Ben Kepes, corporate finance associate Sam Stewart and Mindscape CEO JD Trask, Clare Capital charted key EV and Revenue metrics for 50 listed SaaS companies with the results below:
Congratulations to one of our clients Mindscape for winning the Hi-Tech Start-up Company of the Year award at the 2015 NZ Hi-Tech Awards. This tops off another fantastic year for Mindscape, winning their second award at the NZ Hi-Tech Awards in as many years after taking out the Innovative Hi-Tech Software Product in 2014.
Mindscape were also nominated for the Innovative Hi-Tech Software Product award at the 2015 NZ Hi-Tech Awards.
Clare Capital is very proud of your achievements so far and look forward to where the business is heading.
On the 31st March, MYOB lodged its initial public offering (IPO) prospectus with the Australian Securities and Investments Commission (ASIC) for a listing on the Australian Securities Exchange (ASX).
As MYOB operates in the technology space and given Clare Capital’s past and current work with one of its competitors, Xero (NZX:XRO), the firm sent out a series of tweets regarding some brief analysis on MYOB’s Prospectus.
Through our M&A experience and capital raising, we think this article hits the nail on the head in terms of how Founders should be thinking about selling their business. Moreover, it does not necessarily relate to just start-up tech companies, but provides an overview of the process for entrepreneurs if you are thinking about selling your company. It is definitely worth a read.
Clare Capital was the financial adviser to Environmental Offshore Services on the sale of the business to SLR Consulting.
Environmental Offshore Services (EOS) was a Nelson-based company specialising in offshore oil and gas environmental regulatory regime consultancy. EOS was owned by founder Dan Govier. Services include:
Clare Capital was the financial adviser to NZX Limited on the sale of their online news business, NewsRoom to Sublime Group Limited after NZX conducted a strategic review of options for the business.
NewsRoom is a subscription-based online news service which sends unfiltered press releases, announcements and opinion material to paying subscribers. NewsRoom was established in 1996 and was acquired by NZX in 2007. It’s news feeds serve New Zealand’s top legal and accounting firms, large corporations, government departments, and parliamentary offices.
NewsRoom draws their material from three different sources; free content supplied by organisations and individuals, purchasing content from specialist providers and a designated in-house NewsRoom team creating content on key political stories. Subscribers receive their information via NewsMail (email), intranet feeds and website feeds.
If you ask the simple question of “what is a share price?” – many people struggle to answer. People will have an opinion on whether the share price of Telecom or Air NZ is too low or too high – but they can’t answer the simple question of “why?”. I usually get an answer about assets – but nothing very specific.
So how does (or should) an investment banker think about the value of a business?
I am going to use a minimum of jargon here – I promise. Please see the glossary page for some definitions of valuation terminology, why various terms are used and more information about the valuation methodology.
We are going to cover valuation techniques in a separate post – but here is the Valuation 101 of how investment bankers determine if a share is currently undervalued or overvalued. We use a piece of financial economics called a discounted cash flow (DCF) model. This is a key part of corporate finance. Now value does not always equal price – but as the Benjamin Graham quote goes, “In the short-term, the market is a voting machine and in the long-term a weighing machine”.
The DCF is the primary method in corporate finance theory for calculating value. In corporate finance – value is a DCF…