The gap in valuation multiples between Software as a Service (SaaS) companies and on-premises software firms is shrinking, signaling a significant shift in the software industry. According to a recent study by Aventis Advisors, this trend is driven by the increasing adoption of subscription-based models and cloud pivot strategies by traditional software vendors.
This evolution in the tech landscape carries crucial implications for business valuation professionals, particularly those specializing in the technology sector. Understanding this shift is essential for accurately assessing value and advising clients in software-related transactions.
Key Insights from the Study
The study analyzed hundreds of private deals from 2015 to Q4 2024 to examine the valuation multiples paid for software companies. Interestingly, it did not differentiate between SaaS and on-premises vendors because the traditional lines between these two models have blurred.
Key Findings Include:
- Median Valuation Multiples: Over the last decade, the median software company traded at 16.4x EBITDA and 3.0x revenue.
- Valuation Surge in 2021: Valuations peaked temporarily at 6.0x revenue in 2021 but have since returned to the long-term mean.
- Deal Size Influence: Larger deals commanded significantly higher multiples. Moving from $5 million-to-$20 million deals to those over $500 million effectively doubled the multiple.
- U.S. Registration Impact: U.S.-registered companies enjoyed an additional 4x to 5x on their EBITDA multiple, highlighting the premium associated with U.S. registration.
Why the Valuation Gap is Closing
Traditionally, SaaS companies commanded higher valuation multiples due to their recurring revenue models and high growth potential. Investors favored the predictable revenue streams and scalability associated with cloud-based software.
However, this premium is fading as on-premises software vendors increasingly shift to subscription models and pivot to the cloud, thereby blurring the lines between the two delivery methods.
This shift is influenced by several factors:
- Subscription Revenue Models: Traditional software firms adopting subscription models are enjoying more predictable revenue streams, similar to SaaS companies.
- Cloud Migration: By moving to the cloud, on-premises vendors are reducing upfront capital expenditures and offering scalable solutions, closing the perceived value gap with SaaS providers.
- Investor Perception: As traditional vendors successfully transition to cloud-based models, investors view them more favorably, leading to the narrowing of valuation multiples.
