Premium M&A Advisory Services

Author: Deal Sourcing Division

  • SaaS Valuation: How Buyers Price Software Businesses

    SaaS Valuation: How Buyers Price Software Businesses

    …and Why the Rule of 40 Matters!

    If you’re a SaaS owner thinking about a sale, your valuation is rarely “a multiple.”
    It’s a pricing decision buyers make based on growth durability, retention quality, and profitable scaling and the Rule of 40 has become one of the quickest shortcuts they use to sanity-check that balance.

    This post breaks down:

    • how SaaS businesses are typically valued in M&A,

    • what the Rule of 40 really is (and what it is not),

    • why two companies with the same ARR can trade at very different multiples,

    • and what you can do to push into “premium multiple” territory.

    How SaaS businesses are valued in M&A (the real-world view)

    Most SaaS acquisitions are priced using one of two frames:

    1) EV/ARR (or EV/Revenue) for growth-stage SaaS

    If your business is still reinvesting heavily (or EBITDA is small/negative), buyers typically anchor on Enterprise Value / ARR (or revenue), then adjust for:

    • growth rate consistency,

    • churn/NRR,

    • gross margin,

    • CAC efficiency,

    • customer concentration and contract terms,

    • and operational maturity.

    2) EV/EBITDA for mature, profitable SaaS

    If your SaaS is consistently profitable with stable growth, buyers may lean more on EV/EBITDA, similar to other cash-flow businesses but they still underwrite ARR quality and retention like a SaaS buyer.

    Market context (directional): SaaS Capital’s research has shown the public SaaS “index” multiple around ~6–7x run-rate annual revenue in the 2025 timeframe, used as a directional reference point for private valuation expectations. Private outcomes vary widely based on size and quality, and private deals often clear at a discount to public comps.

    The Rule of 40: definition, formula, and why it shows up in every diligence deck

    The Rule of 40 is a shorthand benchmark meant to answer:

    “Are you growing fast enough to justify your profitability (or lack of it)?”

    The formula (common version)

    Rule of 40 Score = Revenue Growth Rate (%) + Profit Margin (%)

    Profit margin is commonly measured as EBITDA margin, but many investors/boards use free cash flow (FCF) margin instead. McKinsey summarizes the metric as growth rate + free cash flow rate ≥ 40%.
    Finance references often describe it as growth + profit margin (e.g., EBITDA) ≥ 40%.

    Example

    • SaaS A: 35% YoY growth + 10% EBITDA margin = 45 → “Rule of 40 compliant”

    • SaaS B: 55% YoY growth + (-20%) EBITDA margin = 35 → growth is strong, but burn is heavy

    • SaaS C: 12% YoY growth + 30% EBITDA margin = 42 → efficient, but growth may be the debate

    Important: the Rule of 40 is a heuristic, not a law. SaaS Capital explicitly warns against treating it as a strict cutoff (and points to Goodhart’s Law: once you target a metric, it can stop being a good measure).

    Why buyers like the Rule of 40 (and how it impacts valuation)

    In practice, the Rule of 40 functions like a first-pass filter:

    • Above 40: “This scales well. We can pay for growth and trust the unit economics.”

    • Below 40: “We need to understand the tradeoff: is growth real but expensive, or is profitability strong but growth decelerating?”

    McKinsey found that barely one-third of software companies achieve the Rule of 40, and sustaining it is even harder. Translation: if you’re consistently above 40 with clean retention and efficient acquisition, you’re in a smaller, more valuable cohort.

    What the Rule of 40 does not tell the buyer (but will move your multiple)

    A common mistake is to treat Rule of 40 as “the SaaS valuation metric.” It’s not. Buyers will still price around the things that drive risk and durability:

    1) Net Revenue Retention (NRR) and churn quality

    • NRR > 100% (expansion offsets churn) supports premium pricing.

    • Low churn matters, but churn composition matters too: logo churn vs. revenue churn, and whether churn is concentrated in a segment.

    2) Gross margin and cost-to-serve

    High gross margin with stable infrastructure costs signals scalable economics.

    3) Sales efficiency (CAC payback, Magic Number, pipeline quality)

    If growth is “paid for” with inefficient CAC, buyers haircut the multiple because future growth becomes expensive.

    4) Revenue quality and contract structure

    Multi-year agreements, annual prepay, low refund risk, and clear renewal mechanics reduce risk.

    5) Customer concentration + end-market risk

    If one customer (or one vertical) can break the business, buyers reprice.

    6) Product criticality and “workflow embeddedness”

    Software Equity Group notes that buyers reward products that are deeply embedded in workflows and data, and that AI relevance is increasingly visible in deal activity.

    Directional benchmarks: what multiples look like 

    No blog post can quote “the” multiple without misleading you but directional ranges help.

    SaaS Capital’s research has described the public SaaS multiple environment in the mid single digits to ~7x run-rate revenue (depending on the time window), and notes private expectations often land lower, with a meaningful “quality premium” for top performers.

    The practical takeaway:
    If your metrics signal “durable growth + efficient scaling,” buyers compete and multiples expand. If metrics signal “churn risk + expensive growth + founder dependence,” multiples compress, regardless of how attractive the product sounds.

    How to improve your Rule of 40 (without destroying the business)

    Here are levers that typically increase valuation and improve Rule of 40 quality:

    Improve the growth component (the “right way”)

    • Tighten ICP and messaging to reduce churny customers

    • Fix onboarding and activation (time-to-value drives retention)

    • Reprice legacy cohorts (especially underpriced enterprise contracts)

    • Expand with usage tiers / add-ons tied to clear ROI

    Improve the margin component (without faking EBITDA)

    • Cut “random opex,” not the growth engine (buyers can tell)

    • Reduce cloud/hosting cost per customer (optimize infra + usage)

    • Improve support efficiency (self-serve, better documentation, tooling)

    • Build repeatable sales processes (reduces CAC volatility)

    Don’t game the metric!

    Buyers will reconcile Rule of 40 against:

    • cohort retention,

    • ARR bridge,

    • CAC payback,

    • and a quality of earnings view.

    If the score improved due to short-term cuts that damage pipeline or retention, you’ll feel it in diligence.

    A simple buyer-style valuation logic you can use internally

    A clean way to think about valuation in real terms:

    1. Start with ARR (and an ARR bridge that explains every dollar of change)

    2. Underwrite durability (NRR/churn/cohorts/concentration)

    3. Underwrite efficiency (gross margin, CAC payback, burn/FCF, sales productivity)

    4. Then assign a multiple consistent with the risk profile

    Rule of 40 is mostly a shortcut to step (3), but it doesn’t replace step (2).

    Seller checklist: the “value proof” package buyers expect

    If you want fewer retrades and stronger offers, prepare these before going to market:

    • ARR / MRR bridge (new, expansion, contraction, churn)

    • Cohort retention (by segment + channel)

    • NRR/GRR definitions and calculation methodology

    • CAC payback and LTV:CAC (with assumptions stated)

    • Gross margin detail (what’s in COGS vs opex)

    • Product roadmap + dependency map (key people, key vendors)

    • Customer concentration and contract summaries

    • Clean financials (revenue recognition clarity, add-backs documented)

    Why can two SaaS companies with the same ARR have very different multiples?

    Because ARR is not all equal. Retention quality, contract durability, CAC efficiency, concentration risk, and product criticality can move valuation dramatically.

    Final note 

    If you’re considering a sale in the next 12–24 months, the biggest valuation unlock is usually not “growth at all costs”, it’s proving durable growth with efficient scaling. The Rule of 40 is a helpful lens, but the win is building a metrics story that holds up under diligence.

    M&A Sell-Side Fee Calculator →

  • The End of Email Outreach in M&A: Back to the Roots

    The End of Email Outreach in M&A: Back to the Roots

    For years, email outreach was the workhorse of deal sourcing. You could send thousands of messages a week, automate follow-ups, and connect directly with business owners at scale. But let’s face it that era is over. 

    Spam filters are smarter. Inboxes are flooded. Response rates have collapsed. What used to be a high-leverage channel has turned into noise for both sides.

    In M&A deal sourcing, relationships still close deals. Not automation.

    Why Email Outreach is Dead

    • Deliverability is broken. Even with multiple domains and warmed-up accounts, most cold emails don’t land where they should.

    • Owners are numb. They’re used to being “on a list” and ignore the pitch before even reading it.

    • Buyers need trust. No one sells their life’s work to a stranger who sent a generic email blast.

    Back to the Roots: Personal Outreach

    The way forward isn’t more tech. It’s more personal connection.

    • Phone calls. Speaking directly with an owner or even the gatekeeper sets you apart instantly.

    • Letters. A well-crafted, physical letter feels tangible and serious in a digital world.

    • In-person meetings. Nothing builds credibility faster than shaking hands and looking someone in the eye.

    • Introductions. Leveraging networks, advisors, and referrals brings you warm conversations instead of cold rejections.

    The Future of Deal Sourcing

    We’re entering a new phase in M&A where quality beats quantity. Instead of asking, “How many emails did we send today?” the better question is, “How many meaningful conversations did we start this month?”

    Owners don’t want another template in their inbox. They want to feel that a buyer understands their business, their legacy, and their goals. That can’t be outsourced to an algorithm.

    M&A is returning to its roots: person-to-person, trust-based, and relationship-driven. 

    …and this will clean the market from many buyer groups.

  • Industrial Services / USA

    Industrial Services / USA

    In 2024, the US industrial services sector saw some interesting trends in mergers and acquisitions (M&A):

    • Overall, M&A activity slowed down a bit. There was a 5% dip compared to the same time last year, and a bigger 24% drop from the previous quarter. This might be because companies are getting ready for lower interest rates in the future.

    • Deal volume stayed pretty steady, though. In the third quarter of 2024, there were 428 deals, which is slightly more than the previous quarter and a little up from the same time last year. However, the total money invested in these deals went down by 58.2% compared to the same time in 2023.

    • Private equity companies were still very active, especially in companies that provide facility services. They were involved in 66% of all deals in the third quarter.

    • The Industrial Supplies & Parts sector was the busiest, with 193 deals. Machinery and Electrical Equipment and Aerospace & Defense were also pretty active.

    • Looking ahead, things are looking up for M&A activity in 2025. We might see more deals because the new administration might be more relaxed about M&A regulations, and interest rates could go down.

    These trends show that the M&A landscape in the US industrial services sector is always changing. 

    We source Industrial Service businesses for Private Equity, Search Funds and Corporates.

  • M&A Buy-Side Fees

    M&A Buy-Side Fees

    Clarity in fee structures is a crucial component of any M&A buy-side agreement. However, fee structures can vary significantly depending on various factors, making it impossible to apply a one-size-fits-all fee to all projects.

    In the market, there are many different providers of services related to M&A. Most services are concentrated on the sell-side. The buy-side, especially among brokers, is not as popular because fees are typically much lower, despite requiring significantly more work.

    Let’s analyze fees based on customer groups:

    1. Corporate Investors

    The so-called strategic buyer typically engages an M&A buy-side advisor exclusively. They are not just purchasing a service but also the advisor’s network and experience. Even when internal resources are allocated for M&A, it almost always makes sense to rely on external support to focus the in-house team on the integration of the target.

    The fee structure for this group is usually a mix of:

    • Engagement fee
    • Milestone fee (e.g., for management meetings or LOI)
    • Success fee upon closing

    2. Private Equity

    Private equity clients often use deal-sourcing services exclusively for off-market deals, as this is both time-intensive and resource-draining. Engagements are typically non-exclusive, which means outreach is conducted anonymously. Only when a target shows interest is the client’s name disclosed. While this approach has some advantages, it comes with many drawbacks.

    Many PE firms have adopted the habit of widely distributing finder fee agreements. This means numerous deal-sourcing agencies target the same prospects. Many deal-sourcing providers accept agreements based solely on finder’s fees. However, we reject such agreements. We only work with new clients who have “skin in the game” and aren’t merely relying on a lucky break.

    The common fee structure here includes:

    • Engagement fee (credited toward the success fee)
    • Success fee upon closing

    3. Search Funds

    Anyone familiar with Stanford University’s statistics knows that only a small percentage of search funds (whether traditional or self-funded) successfully close a deal or find a suitable target. Search funds typically lack proof of concept or a track record, which makes it harder to generate interest from targets. As a result, the likelihood of success for the service provider is also lower.

    Our fee structure for this group mirrors that of private equity, though with a reduced engagement fee:

    • Engagement fee (credited toward the success fee)
    • Success fee upon closing

    It’s actually quite simple. Professional M&A buy-side support, advisory, and sourcing involve significant effort and investment from the service provider in the client’s deal. Quality should be the top priority, as both the provider’s and the client’s reputations are at stake. We are aware that some providers offer their services on a “success fee only” basis.

    However, this approach typically relies on automated outreach and generates a large amount of waste—or “scrap,” as one might say in metalworking. 

  • How to approach businesses to buy

    How to approach businesses to buy

    The US American entrepreneurial spirit thrives on established businesses. As a potential buyer, you see the value in a company with a proven track record. But how do you approach the owner, who might not be actively looking to sell? Here are some strategies to initiate a conversation that paves the way for a successful acquisition:

    1. Do Your Homework: Before reaching out, research the business thoroughly. Understand its financials, customer base, market position, and recent performance. This knowledge shows respect for the owner’s hard work and allows you to tailor your initial conversation.

    2. Build Rapport: Identify common ground. Are you alumni of the same university? Do you share a passion for the industry? A genuine connection can go a long way in breaking the ice. Consider attending industry events or joining relevant associations where you might encounter the owner organically.

    3. The Soft Sell: Avoid blunt statements like, “I want to buy your business.” Instead, express your admiration for what they’ve built. Mention a specific aspect of the company’s success that caught your eye. This piques their interest and opens the door for a broader conversation. For example, “I’ve been impressed by your company’s commitment to sustainable practices. I’d love to learn more about your vision for the future.”

    4. Leverage Your Network: See if you have any mutual connections. A warm introduction through a trusted contact can make the owner more receptive. The intermediary can vouch for your seriousness and professionalism.

    5. Consider the Timing: Is the business experiencing a period of growth? Approaching an owner stressed about overcoming challenges might not be the best strategy. Look for signs that they might be open to an exit, such as nearing retirement age or a recent shift in industry trends.

    6. Be Respectful of Their Time: Keep your initial contact concise. A well-crafted email outlining your background and interest in the company is a great way to start. If they respond positively, propose a brief call to discuss your vision further.

    7. Prepare for All Responses: The owner may not be interested in selling. Be gracious and express your continued interest in following the company’s progress. This leaves a positive impression that could open doors in the future.

    Remember, acquiring a business is a marathon, not a sprint. By building trust and demonstrating a genuine interest in the company’s future, you’ll be well on your way to a successful conversation with the owner.

    Get help to save time! You are on our website! Congrats! First step done! Now you have to find the “Contact us”-Button. 😉

  • How to open a door

    How to open a door

    Our profession is deal sourcing for corporate transactions. Without this part of the M&A process, no deal takes place. That is why this step also needs to be professionalized. We often see companies sending out pitches to students or juniors. Not very targeted and not very successful.

    But what makes the difference?

    Firstly, the mindset is important. We see ourselves as door openers and not as connectors. This is a fundamental difference, because in order to open the door at the target, you need the right key. And since corporate transactions are complex, there have to be several suitable keys.

    Key 1 – The story
    Why was the target approached and what fit do we see on behalf of our customer?

    Key 2 – Competence
    The first questions must be answered by us. We are the first face the target sees. We must be competent and have understood the business model of both sides.

    Key 3 – Communication
    The third key is the ability to communicate. Symapthies must be transferred so that the potential buyer has it easier in the further course. If the chemistry is right at the beginning and there is a good atmosphere, it will be a little easier later on.

  • E-2 or E-5 Visa through acquisition

    E-2 or E-5 Visa through acquisition

    Have you ever dreamed of living and working in the United States? Are you an entrepreneur with a bold business vision?

    Acquiring an existing U.S. company through the E-2 (or E-5) Treaty Investor Visa program could be your key to making those dreams a reality.

    Why Acquire a US Business?

    Starting a business from scratch can be time consuming and risky. Acquiring an existing business offers several advantages:

    Faster visa processing:
    Demonstrating a functioning business with established operations can potentially expedite your visa application process.

    Reduced risk:
    Existing companies already have a customer base, brand recognition and operational infrastructure, minimizing initial uncertainties.

    Proven track record:
    You gain access to historical financials and industry insights, allowing you to make informed decisions.

    Existing Team:
    Leverage the knowledge and skills of an established team to hit the ground running.

    Is an acquisition right for you?

    Acquiring a business is a significant undertaking. Consider these factors carefully:

    Investment requirements:
    The amount of “substantial investment” varies by industry and company size. Be prepared to invest a significant amount of capital.

    Treaty Eligibility:
    Make sure your nationality falls under a country with a valid E-2 treaty with the U.S.

    Business Knowledge:
    Evaluate your ability to manage and develop the chosen business sector.

    Legal and Financial Expertise: Seek professional guidance from immigration attorneys and business consultants to navigate the acquisition process and visa application.

    Take the first step

    If you are interested in acquiring a U.S. company for your E-2 visa, here are your next steps:

    Research the E-2 visa requirements:
    Familiarize yourself with the program’s eligibility criteria and application process.

    Explore available companies:
    Here is the hard part of the project. There are platforms like Biz-Buy-Sell, but the brokers there will hardly take you seriously as a foreign investor. We have often heard that interested parties don’t even get feedback on an inquiry. The US market is large and competitive. The brokers prefer to introduce a US American prospective buyer to the seller, as this can be checked in advance with credit scores and the like. Here it is strongly recommended to consult a consultant (we happen to offer this  *smile*) who can build a bridge, knows the processes in the USA and is on site.

    Connect with experts:
    Consult with immigration and business attorneys for customized guidance.

    Remember, acquiring a U.S. business is a strategic decision. Approach it with thorough research, professional guidance and a clear vision for success. With careful planning and execution, this path could open the door to your American dream through the E-2 visa program.

    Let us know if you need support. We are the #1 in the USA on the Buy-Side.

  • Markteintritt USA (deutsch)

    Markteintritt USA (deutsch)

    Wir sind die einzige, deutschsprachige M&A Buy-Side Unternehmensberatung mit eigenem US-amerikanischen Deal Sourcing Team vor Ort in den USA. Unseren Kunden aus der DACH Region bieten wir Deal Sourcing in den USA und M&A Beratung mit deutschsprachiger Projektleitung an. Unser Deal Sourcing Team findet das zu unseren Kunden passende Zielunternehmen, auch oder gerade wenn, es noch nicht auf dem Markt ist.

    Wir haben oft DACH Unternehmen hier in den USA scheitern sehen, weil sie die verschiedenen Business Kulturen und Mentalitäten unterschätzten. Der US Markt ist riesig, aber auch sehr kompetetiv. Die amerikanischen Marktteilnehmer legen großen Wert auf Vertrauen und amerkanische Referenzen. 

    Wir raten grundsätzlich zu einer Akquisition, anstelle einer Neugründung. 

    Mehr Informationen und die Buchung eines kostenlosen Erstgepäches gibt es hier:

    https://eight-m.com/unternehmenskauf

     

  • Across the Pond: Navigating M&A Differences Between US and European Buyers

    Across the Pond: Navigating M&A Differences Between US and European Buyers

    Mergers and acquisitions (M&A) play a pivotal role in shaping global business landscapes. But when buyers and sellers hail from different continents, cultural and legal nuances can complicate the process. In the vibrant arena of M&A, navigating the contrasting approaches of American and European players is crucial for a smooth deal.

    Deal Structuring:

    • Locked Box vs. Closing Adjustment: US deals often favor a “closing adjustment” mechanism, where the target’s financial performance between signing and closing impacts the final purchase price. In Europe, “locked box” structures are more common, fixing the price at signing, potentially shifting risk to the buyer.

    Disclosure and Warranties:

    • “Buyer Beware” vs. Sellers on Their Toes: US transactions typically involve extensive seller representations and warranties, with broad indemnification clauses for breaches. European M&A leans towards “buyer beware,” placing the onus on buyers to scrutinize data rooms and identify potential issues.

    Termination Rights and Walkaway Provisions:

    • US Exit Strategies vs. European Commitments: US agreements often grant buyers more “out” options through termination clauses and “material adverse change” provisions. European deals tend to be more binding, with fewer contingencies for pulling out once signed.

    Regulatory Landscape:

    • CFIUS vs. EU Competition Review: US deals involving foreign buyers face scrutiny from the Committee on Foreign Investment in the United States (CFIUS). In Europe, mergers go through the European Commission’s competition review process, with different thresholds and considerations.

    Negotiation Style and Pace:

    • Direct and Deal-Centric vs. Relationship-Focused: US negotiations tend to be quicker and more direct, focusing on deal terms. European negotiations prioritize relationship building and may involve slower, more consultative processes.

    Financing Approaches:

    • Equity-Heavy vs. Debt-Driven: US M&A often rely heavily on equity financing. European deals, particularly large ones, frequently involve bank loans and debt syndication.

    Cultural Considerations:

    • Open Communication vs. Hierarchy and Formality: US dealmaking culture promotes open communication and informality. European culture often emphasizes hierarchical structures and formal communication styles.

    Understanding these differences is essential for both US and European players venturing into cross-border M&A. By acknowledging and adapting to these unique approaches, buyers and sellers can pave the way for successful transactions that bridge continents and foster global business growth.

  • Valuation of a company with negative EBITDA

    Valuation of a company with negative EBITDA

    In the realm of business valuation, EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, is a critical measure of a company’s financial performance. While positive EBITDA signals a company’s ability to generate profits, negative EBITDA raises concerns about a company’s financial health. However, not all companies with negative EBITDA are doomed to fail. Some companies may be in the early stages of growth or experiencing temporary setbacks, making their valuation a more complex endeavor.

    Understanding negative EBITDA

    Negative EBITDA indicates that a company’s operating expenses exceed its revenues, resulting in a loss. This can be due to several factors, including

    High start-up costs: Early-stage companies often incur significant expenses related to product development, marketing, and hiring, resulting in negative EBITDA.

    Industry cycles: Companies operating in cyclical industries may experience periods of downturn, resulting in reduced revenues and negative EBITDA.

    Inefficient operations: Inefficient management practices, outdated technology, or poor cost controls can contribute to negative EBITDA.

    Valuation approaches for companies with negative EBITDA

    Valuing a company with negative EBITDA requires a more nuanced approach than traditional valuation methods. Here are some commonly used methodologies:

    Discounted cash flow (DCF) analysis: DCF analysis projects a company’s future cash flows and discounts them to their present value. This method is particularly useful for companies with negative EBITDA because it focuses on future profitability potential.

    Revenue-Based Valuation: This approach compares the company’s sales multiple to similar companies in the industry. While it’s less common for companies with negative EBITDA, it can provide insight if comparable companies exist.

    Asset-Based Valuation: This method focuses on the value of a company’s assets, assuming they could be sold individually. It’s relevant for companies with significant physical assets, such as real estate or machinery.

    Venture Capital Method: This approach is often used for early-stage companies with limited financial history. It assigns a value based on factors such as market potential, team expertise, and intellectual property.

    Factors affecting valuation

    The valuation of a company with negative EBITDA depends on several factors:

    Cause of negative EBITDA: Understanding the cause of negative EBITDA is critical. A temporary downturn may be less concerning than chronic inefficiency.

    Growth potential: Investors are evaluating the company’s potential for future profitability. A clear growth strategy and strong market positioning can increase valuation.

    Financial Strength: The company’s cash flow position, debt levels and access to capital are important indicators of its ability to weather challenges.

    Industry dynamics: The overall health and growth prospects of the industry in which the company operates play a significant role in its valuation.

    Conclusion.

    Valuing a company with negative EBITDA is not an exact science and requires careful analysis of several factors. While negative EBITDA is a cause for concern, it doesn’t always mean a company is failing. Companies with strong growth potential and well-defined strategies may still have investment value. Investors should thoroughly evaluate the company’s underlying fundamentals, market dynamics and future prospects before making an investment decision.