Industry – Software and SaaS

The Austin Dale Group has over 30 years of experience working in the software industry. We understand the business as industry executives, technologists, and deal makers. We understand what operating models deliver higher returns and what attracts higher valuations from buyers.

Industry Trends

  • Remote work, collaboration and videoconferencing – The coronavirus pandemic has accelerated adoption of telecommuting and virtual workplaces. Software is the key enabler of this new workplace trend.
  • Cybersecurity – The arms race is continuing between organizations and bad actors who would steal information or disrupt operations. High profile ransomware attacks on companies and municipalities have made IT administrators desperate for added security.
  • Cloud everything, 5G infrastructure, and increased utilization of edge computing for AI, machine learning and IoT – investors are looking for ways to place bets on these technologies which are enabling new ways of doing business.
  • Telehealth, telemedicine, online education and e-learning – these vital services must continue, even in a socially distanced world. Society has been forced to adopt new ways of interaction and many investors are betting that society will continue using these new models after the pandemic is over.
  • Shift to Software as a Service (SaaS) and Recurring Revenue – Software producers are steadily moving away from the traditional perpetual licensing models and towards subscription models. Software subscription is often bundled with hosting services in cloud deployment models. Whether for on premise or cloud deployment, subscription revenue evens out revenue streams and cash flow for software companies.

Market and Valuation Trends

  • Vaccinations and strong markets fuel interest in M&A – The availability of COVID vaccinations and continued strength of the financial markets is spurring interest and investor confidence. The pandemic forced a shakeout differentiating strong from weak companies. Companies that maintained strong balance sheets through the pandemic are attractive to investors, particularly in sectors which support virtualization.
  • Recurring revenue is king– Multi-year recurring contracts with reliable corporate or institutional customers command the highest valuation multiples. Perpetual licensing models are seen as out-of-date and buyers reduce valuations to account for the cost and potential revenue drop out which will be seen during a transition to SaaS.
  • Valuation trends – Strong valuations continue for companies that have reached scale (greater than $5M revenue, sometimes less for highly desirable markets, technology, etc.). Capital markets look closely at the financial performance of companies through the pandemic. Companies that have been prudently managed and continued to deliver solid financial returns are being rewarded with investor and lender confidence.

What Buyers Want

  • Recurring revenue – Cashflow provides a strong foundation for growth.
  • Scale – Bigger is better. Economies of scale and higher valuation multiples help larger players.
  • Reliable customers – Good customers who have a consistent payment history, while avoiding too much revenue concentration with a small group of customers.
  • GAAP Financials – Recurring revenue needs to be accrued appropriately. Cash-basis accounting can cause revenue recognition problems, particularly when lump payments are received for longer subscription periods.