Executive Chairman of FE International, the leading M&A advisory firm for SaaS, e-commerce and content businesses.
Since March 2020, many businesses have pivoted in the way they
work because of government-mandated lockdowns. Companies had to operate almost exclusively on a virtual basis overnight.
Not surprisingly, the shift has had a strong effect on the SaaS
space. But what’s here to stay? What trends are going to hold strong
as the distribution of the COVID-19 vaccine increases, governments lift
pandemic-related restrictions, and the world is finding a new footing?
As the founder of a mergers and acquisitions firm that specializes in SaaS
businesses, I have seen trends come and go. And after valuing more than a
thousand businesses, I can tell when something is going to increase a SaaS
company’s worth versus when that trend will be excess baggage in a few months’ time.
Here are the big business trends that are here to stay for SaaS.
The Remote Business Model Isn’t Going Away Anytime Soon
At the height of the pandemic, more than 70% of US
employees worked from home. Today, that figure stands closer to 50%, according to a Gallup report. With about 49% of the US population fully vaccinated, the large percentage of people still working from home means businesses were able to transition more seamlessly to a fully remote model than initially expected. Many are choosing to remain remote or adopt a flexible or hybrid working model moving forward.
This is good news for SaaS businesses that took on more clients in 2020. Companies will continue to rely heavily on digital products and services to operate, even as physical offices begin to open.
Productivity SaaS Businesses and Apps Are More Popular than Ever
Because more people are working from home full time, productivity SaaS businesses and apps are benefitting significantly. Collaboration software, Atlassian apps, EdTech, and similar SaaS tools are in high demand – both for end-users and for companies looking to purchase them.
For example, during the first half of 2021, we brought several notable 8-
and 7-figure SaaS businesses to market, and all were highly sought-after by potential buyers.
The E-commerce Boom is Benefiting SaaS Developers – Especially on Shopify
The last year saw more consumers making online purchases than ever before, and e-commerce retailers weren’t the only ones benefiting. Shopify
apps that help e-commerce retailers are in high demand. In fact, 87% of merchants already rely on Shopify apps to run their businesses and 84% of apps on the Shopify marketplace are post-revenue.
To spur even more Shopify app development, Shopify announced at its annual conference in June that they will be cutting the commissions on the first $1M of in-app store revenues from 20% to 0% (and 15% after that). This financial boost will help app owners explore new growth avenues, like free tiers, native paid advertising and increased development.
With more customers than ever before and increased financial incentives from Shopify, expect more SaaS developers to develop tools for the e-commerce community.
The Basics Won’t Cut It Anymore: Customers Demand High-quality Integrations
As technology use increased during the pandemic, customers began
to demand more from their SaaS solutions.
Successful companies have addressed this issue by building out additional
features on their existing platforms to create more integrated and
holistic product offerings. These companies that have taken their
consumers seriously by adding new features are being rewarded with reduced churn and a higher average revenue per user. They also see increased conversion throughout the lead funnel (a key difference now being that end-users are far less price-sensitive than before).
I’m also seeing successful SaaS companies grow their customer support coverage to increase customer satisfaction and retention. Given many self-funded micro-and mid-cap SaaS companies operate with higher margins than most other industries, the net result is an increase in financial performance.
Politics are Impacting SaaS Business Owners
In my company’s recent Mid-Year Report, my team discusses U.S. President Joe Biden’s proposed increase in the capital gains tax top rate to 39.6%. With the additional 3.8% surtax on investment income, that would raise federal tax rates for wealthy investors to as high as 43.4%. Plus, the U.S. Federal Reserve announced that it would increase rates in early 2023 to stave off inflationary pressures.
Tax increases are coming to the U.K., too as the government has announced it will raise the corporation tax to 25% in April 2023. Other governments around the world are likely to follow this pattern.
For SaaS business owners, this could mean higher taxes on revenue down the road. On the flip side, investors are increasingly looking to acquire companies in the U.S. now, before any capital gains tax increase goes into effect. This is good news for SaaS businesses looking to sell, as it means there is more competition for their business.
The Increase in SaaS Reliance (and Taxes) = An Increase in SaaS Valuations
As more businesses and individuals rely on SaaS tools for their businesses and professional needs, their attractiveness to investors is also rising. My firm has already seen a 47% increase in SaaS deals from the first half of 2020 to the first half of 2021.
Combined with the above factors, this increased demand is also causing multiples to rise across the entire SaaS industry. Multiples will likely persist around 5x – 8x in the second half of 2021, as conditions should remain favorable for companies looking for exits.
The global COVID-19 pandemic brought economic activity to a near standstill. However, the SaaS industry has been thriving and will continue to do so for the foreseeable future. Not only can SaaS business owners
see growth in customers and revenues, many are likely to see an
increase in the overall value of their company.
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