SaaS M&A: Full Sale vs. Majority Recapitalization
Understanding the Two Main Types of SaaS M&A
When a SaaS founder decides to pursue an exit or liquidity event, the two most common paths are:
1. Full Sale to a Strategic Acquirer
A full acquisition occurs when a larger company, typically a strategic acquirer, purchases 100% of the SaaS business. This buyer could be a competitor, a company looking to expand into a new market, or a business seeking to enhance its product offerings with your technology.
There is some nuance here, as many strategic acquirers are owned by private equity (PE) funds. In these cases, the PE firm often funds or “sponsors” the transaction as a “bolt-on” acquisition to its portfolio company.
2. Majority Recapitalization by a Private Equity Firm
A majority recapitalization (recap) involves selling a controlling stake (typically 51-80%) of the company to a private equity firm while the founder and management team retain an ownership stake. The PE firm provides capital for growth, professionalizes operations, and eventually seeks another exit, typically within 3-7 years.
Key Considerations Before Choosing a Path
Both M&A options offer unique advantages and trade-offs. Founders should assess several factors before making a decision:
1. Liquidity Needs
Full Sale: Maximizes immediate liquidity. Founders receive cash upfront but forfeit future upside.
Majority Recap: Provides a partial cash-out while maintaining equity for a future exit. PEAK recently wrote an article about rollovers.
2. Risk Tolerance
Full Sale: Eliminates financial risk but may result in loss of control and integration challenges.
Majority Recap: Retains ownership risk but allows continued participation in the company’s future growth.
3. Cultural Fit
Full Sale: The acquirer often imposes its own culture, processes, and leadership structure.
Majority Recap: The founder generally retains influence, and PE firms typically support the existing culture while driving operational efficiencies.
4. Tax Implications
Full Sale: Typically results in a single taxable event, usually at long-term capital gains rates.
Majority Recap: Often structured to defer some tax liability, as founders roll over equity into the new entity.
5. Rollover Equity (“Second Bite of the Apple”)
Full Sale: No future upside—founders receive full proceeds and exit.
Majority Recap: Founders roll over 10-40% equity, often leading to a larger second payout when the PE firm exits.
6. Desire to Continue Working & Future Role
Full Sale: Typically requires a transition period (6-24 months) before the founder fully exits.
Majority Recap: Founders often stay involved, leading growth with PE backing.
7. Employee Retention
Full Sale: Acquirers may consolidate teams or restructure operations.
Majority Recap: Employee equity incentives can be restructured, often improving retention.
8. Customer Retention
Full Sale: Customers may experience service changes post-acquisition.
Majority Recap: Business continuity is preserved, reducing customer churn risk.
Valuation Considerations
M&A valuations for SaaS companies are highly subjective and vary based on growth, revenue retention, market conditions, and other factors.
Full Sale Valuation
Typically ranges from 6x-15x ARR, depending on strategic fit, synergies, and financials.
Acquirers may justify premium valuations if they can cross-sell or integrate products seamlessly.
Majority Recap Valuation
Private equity firms focus on revenue growth, scalability, and customer retention, with valuations usually in the 5x-12x ARR range for high-quality companies.
Typically lower than strategic acquisitions, but the potential for a second exit ("second bite of the apple") can lead to a greater overall return for founders.
Conclusion: Which Path is Right for You?
Choose a full sale: if you prioritize maximum liquidity, risk elimination, and a clean break.
Choose a majority recap: if you want partial liquidity, continued leadership, and the potential for a second payout.
Each founder’s goals are different, and the right M&A strategy depends on personal and business objectives. Evaluating these factors with financial advisors and M&A experts will help ensure the best possible outcome.