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Average Cost of Service (ACS) is another important SaaS metric for finance to track and to educate the company about. When used in isolation, it doesn’t tell us much. When used in combination with annual recurring revenue (ARR) and customer acquisition costs (CAC) to name a few, it is very powerful. It can help answer questions about pricing effectiveness, margins, and payback. Once you have ACS, you can run scenarios to determine how your variable and unit costs will change when you add more customers to your cost structure. ACS = recurring service expenses / sum of all current customers maintained using such services The recurring cost of all engineering, support, account management, sucomer service and billing activities plus all physical infrastructure and systems required to maintain a customer, including loaded labor costs.  Below is one of the top universally tracked metrics we have seen in the market that strategic acquirers are focused on for privately held software companies. Prioritize this to have an edge during negotiations. Churn Rate Churn measures the number of customers who cancel their subscriptions for a given period. This metric indicates the long-term viability of a SaaS or software business, as higher churn means a company is losing out on customers and revenue. What is the average churn rate? In SaaS, the average churn rate is around 5%, and a “good” churn rate is considered 3% or less. However, this varies greatly across businesses and industries, so in reality, there is no universal “average” churn rate. Recurly sampled over 1,500 subscription companies in 2018 from across their customer base using their platform to understand the average churn rate by industry. The average churn rate for SaaS companies landed around 4.8%, with upper and lower quartiles of 8.5% and 2.9%, respectively.  The biggest variations between average churn rate by industry depend on whether services are sold to businesses or consumers. SaaS, for example, includes a higher proportion of B2B products and services, all of which tend to experience lower churn. Five specific factors that appear to correlate with variations in average churn rate: · Industry - Every industry has different factors that affect churn · ARPU - Higher ARPU correlates to less churn · Contract length - Longer contracts reduce churn · Company age - Older companies experience less churn · Company funding - Funded companies have higher churn rates Tip for reducing churn Increase your proportion of annual contracts - Annual plans are essential when reducing churn, yet KBCM reports that nearly 20% of SaaS companies still have an average contract length of less than one year. There’s no excuse for a SaaS company not to be offering annual contracts—increasing your proportion of annual to monthly plans is one of the fastest ways SaaS companies can reduce churn. 
Below is one of the top universally tracked metrics we have seen in the market that strategic acquirers are focused on for privately held software companies. Prioritize this to have an edge during negotiations.
Annual Recurring Revenue (ARR) ARR is an acronym for Annual Recurring Revenue, a key metric used by SaaS or subscription businesses that have term subscription agreements, meaning there is a defined contract length. It is defined as the value of the contracted recurring revenue components of your term subscriptions normalized to a one-year period. ARR is the less frequently used alternative normalization method of the two common ones, ARR and MRR. It is used widely in B2B subscription businesses unless as well as being adopted in other recurring revenue services business, such as subscription IT Maintenance. Often it is viewed as an annualized version of monthly recurring revenue (MRR), althought it does vary. From an acquirers’ perspective, the predictability and stability of ARR ensures that the metric can be used to compare the company’s performance against its peers, as well as to compare it with its own performance across time. ARR also adds essential context for other metrics. For example, say you have a churn rate of 5%. Is that reason to worry? Or is it acceptable? But when you look at the churn in a bigger picture with the ARR factored in, you know if it is reason enough to worry. See Churn as well as ACS as complementary metrics. Calculating Annual Recurring Revenue To effectively use ARR as a metric in your business, you must have term agreements with a minimum duration of one year, or the majority of your term agreements must be one year or more. It is typically adopted by subscription businesses with multi-year agreements. ARR = (Sum of subscription revenue for the year + recurring revenue from add-ons and upgrades) - revenue lost from cancellations and downgrades that year. It's important to note that any expansion revenue earned through add-ons or upgrades must affect the annual subscription price of a customer. Any one-time options should not be included in this calculation. TKV-6 Strategies is a boutique advisory firm with a focus on providing M&A advisory, capitalization, valuation, due diligence and other corporate development services to technology, technology-enabled and IP centric companies. Our sector expertise includes software, hardware, SaaS, IT managed services as well as tech enabled and IP driven companies TKV-6 Strategies facilitated acquisition of Ansira Partners’ division carveout by Wiser Solutions3/24/2022
The transaction marked another transaction for M&A firm in the pricing and commerce intelligence SaaS space
DALLAS TX, Thursday March 24, 2022 - Award-winning M&A advisory firm TKV-6 Strategies is pleased to announce the acquisition of a divisional carve out from Ansira by Wiser Solutions, a San Mateo based company focused on commerce execution SaaS products. Ansira, a global marketing technology and solutions company provides brands and their partners with marketing solutions to design relevant and persuasive experiences. Wiser Solutions acquired a SaaS software platform out of Ansira focused on pricing and market intelligence solutions. TKV-6 Strategies acted as the M&A advisory firm to Wiser Solutions, providing identification of the opportunity and advisory services to the company as it acquired the pricing and intelligence division from Ansira Partners. About TKV-6 Strategies TKV-6 Strategies (To Know Value - 6 principles of establishing true shareholder value) is an award-winning boutique M&A Advisory firm based in Dallas, TX. The firm specializes in software, technology enabled platforms, SaaS, electronics, and IT services. With over thirty years of experience, TKV-6 professionals are passionate about helping clients achieve their desired outcomes and finding the ideal financial or strategic partner/acquirer. Awards include Corporate Deal of the Year (M&A Atlas Awards), Investment Banker of the Year finalist (The M&A Advisor), D-CEO Mergers & Acquisitions Awards, among others. www.tkv6strategies.com For further information, please contact: Todd Viegut, Principal - Managing Director [email protected] About Ansira Ansira is an independent, global marketing technology and services firm that empowers companies operating in a distributed ecosystem to improve performance by realizing a connected marketplace. Ansira and its subsidiary Sincro enable brands and their agents, franchisees, dealers, and distributors to drive demand, create seamless customer experiences, and drive revenue through marketing services and proprietary technology platforms. Ansira is majority owned by Advent International. Teams operating across the US, Europe, South Asia, and Oceania, arm brands and their ecosystems with digital offerings, channel partner marketing technology and services, and local marketing technology to make these experiences possible. For more information on Ansira visit Ansira.com or LinkedIn, and to learn more about Sincro, visit SincroDigital.com or LinkedIn. About Wiser Solutions Wiser Solutions® is the global leader in Commerce Execution SaaS products. Our Commerce Execution Suite provides brands, retailers, brokers, and distributors with the intelligence needed to make better decisions, online and in-store. Wiser’s platform supports a variety of use cases, from market awareness and price management to shelf intelligence and retail execution. Why is Wiser the trusted retail analytics provider of over 500 brands and retailers around the world? Better data. Our mission is to build services that capture and present the most accurate and actionable information from millions of websites and tens of thousands of physical stores. Wiser’s near real-time intelligence offers multichannel visibility to optimize daily and hourly revenue, margin, and marketing-related strategies. www.wiser.com M&A Transaction Constructs
Once the discussions are moving forward, you enter the development of a deal. Driven largely by your M&A advisor, this period is where you bring your desires, needs & values to the forefront to create the best deal for you. This is where you have the opportunity to exploit the intangibles and more qualitative elements of your business, such as ensuring the buyer is understanding long term impact of your technology platform, or understands the ability of the business to scale quickly through the buyers channels. Components of a deal A number of different components make up the compensation construct of a transaction: cash, earn-out, retention bonus’s, executive & employee compensation agreements, stock/equity, and more. We must note that every transaction is different and guided by how the buyer views the company and how they prefer to structure acquisitions. As a general rule, the seller and M&A advisor should work early-on assessing transaction structure alternatives so those can be conveyed up front when negotiating a deal.
These can come in the form of cash, stock/equity, or a combination and will be time based, milestone based, achievement based or a combination of several. Preferably you would minimize earn-outs or earn-ups, but in some cases these can provide a means to bridge the gap between a buyer and seller’s relative valuations. The key to these components is a rigid structure upfront as to how the company will operate and performance against the earn-out metrics will be measured. This takes a bit of negotiation and creative ‘outside the box’ thinking. There are a few tricks and methods which ease the tension in establishing these metrics. Structuring the Transaction: Typically there are three types of deal structures. Each has their benefits and drawbacks for both the seller and the buyer. It is imperative you assess all options with your M&A advisor, accountants and lawyer when structuring an acquisition, as some of the implications (for instance taxation) can be embedded and not readily visible, nor understood. Early understanding of what works and is best for the seller and buyer is important to assist in guiding the terms of the relationship from the start. These include Asset Acquisition, Stock/Equity Acquisition and Merger/Restructure. More on these can be found here: Types of Deal Structures Although transactions are complex, it is important to keep the principles simple & clean. By positioning your company up front then exploiting the value during the marketing process, and being flexible in deal terms until you have the whole picture, you can raise your return. Combining several components constructively can be a win for all (close consideration, earn-out, retention bonus for employees, and roll over equity). Example Deal Transaction Scenarios When examining types of transaction, they are often broken down into strategic, financial or financial with a strategic vein. More on these can be found here: Types of Buyers Strategic Sale: This is typically a 100% sale of the company. It usually comes with cash or cash + equity, with employment agreements to facilitate transitions and an earn-out/up opportunity for the seller. Often it can be facilitated to include an employee retention pool (something this firm/TKV6 is a great believer in), a monetary incentive to continue to engage employees following the transaction and reward them for their efforts. Example elements of a transaction:
Majority Sales to Strategic: A more rare transaction, this is a 51% - 100% sale of the equity of a company. It can allow the company to continue operations unabated once the acquisition has closed. The company maintains independence with a structured goal that the company will be liquidated in the future. This ensures that the business owner can easily secure wealth of their portion of the entity down the road. These scenarios have elements of a strategic sale as well as elements of the following financial investor model. Financial Investor / Private Equity Transaction: This is a sale of the majority of the company and generally includes equity retention by the owner, often leaving the owner with more equity than anticipated. These deals are often structured to acquire the majority of a company and infuse operating capital and building leadership to drive the business to the next level. The objective is to position the resulting entity to be able to aggressively grows (15%-30% per year) over the next 3-7 years (typically) with full expectation the company will be sold when it reaches a certain goal. Example elements of a transaction:
It is not uncommon for a business owner who has spent years building a software or IT services company to embark on a transaction of this nature and receive as much, if not more, from the “second bite of the apple” as he took home upon the first sale to the financial investor (with a strategic vein).
“I have never cared what something costs; I care what it’s worth.” – Ari Emanuel, co-CEO of William Morris Endeavor Each deal comes with pros and cons, but in each type of transaction you can support your goals as a seller if the transaction is approached properly. DEALS ARE COMPLEX. There is much much more to it than these 60,000ft examples prevail. Should you want to retain operational oversight, hold shares, or receive a large buy out, all are possible. Discussing types of sales with your M&A advisor makes certain your values are put first in any transaction, ensuring considerable success in any deal. Types of Deal Structures
Asset Acquisition Asset acquisitions are a well-known and more traditional way of structuring an M&A deal. In this structure, a buyer purchases certain assets of a target company, typically with cash. Often an asset acquisition is conducted if the prospective buyer wants to purchase particular assets while not taking on any of the associated liabilities of the seller, which stay with the business entity. Asset acquisitions do tend to produce high tax costs for both the buyer and seller and the transaction can be an extremely time-intensive process. This process is also not ideal for buyers who are looking to acquire non-transferable assets like licenses and patents. Stock Purchase In a stock purchase acquisition, the buyer acquires all or a majority of a seller’s stock from its stockholders. Unlike an asset acquisition, all of the target company’s assets and liabilities are transferred to the buyer. The buyer will now own all contracts, intellectual property and licenses. The structures typically allow for more flexibility in the deal structure, benefiting both side, and taxation events are typically significantly lower for stock purchases. One main disadvantage of stock purchase agreements to consider is that all financial or legal liabilities of the selling company will be transferred to the acquirer, thus extensive reps and warrants are often mandated by the buyer. Dissenting shareholders may also be an issue during this process, as most buyers want full buy-in from all shareholders. Equity Purchase through Restructure. One very common practice by financial institutions is the acquisition through the establishment of a new entity (newco) of which the newco has new ownership (private equity group & the sellers (if a minority stake is retained)), where the selling entity receives cash as well as rollover equity in the newco. This is a common structure which facilitates the transaction and structured in a fashion to allow the existing selling entity to continue operating in essentially the same fashion as it has been. The result of the transaction is the buyer having majority control and the seller having a minority stake. The seller is typically given cash, stock or both in exchange for all assets, licenses and intellectual property. In structuring the deal, the seller’s company is reconstituted or an entirely new entity is created. This often is a very tax friendly method, and appeals to financial buyers. Comparatively, these are generally a simple deal process. Exerpts Kison Patel of from DealRoom
M&A Advisor vs Investment Banker vs Business Broker
M&A advisory firms and investment banking firms are similar in their services, although there are some distinct differences. Essentially M&A advisors bridge the market gap between large transactions that are clearly led by institutional investment bankers (those where the deal size is typically greater than $250 million), and on the lower end those transactions which are usually facilitated by business brokers (typically less than $2-$5 million). Investment bankers typically offer a broader range of services and work with much larger corporations. Such services include public stock transactions, fairness opinions, public stock offerings, etc. These transactions require broker-dealer licensing in order to facilitate trades and transactions, where M&A advisory firms as a rule of thumb work with privately held businesses with revenue less than $250 million and often EBITDA less than $25 million. In practice, lower middle market transactions (private companies with less than $250M in revenue) do not require the advisor to be broker-dealer licensed as long as they comply with regulatory guidelines. Thus, you will find that the majority of middle market M&A advisory firms often partner with a major investment bank when regulatory requirements necessitate. In general, investment bankers are highly transaction driven, focus on volume throughput and have minimum fee expectations, which tend to limit the size clients that they serve to larger institutions. M&A advisors tend to be boutique in culture and consultative in nature and may work with small to mid-market clients in the strategy and planning phases as they consider their exit, liquidity or succession alternatives, then utilizing the deeper knowledge of the company they manage the transaction process often yielding highly successful outcomes. Both M&A advisors and investment bankers run a process to sell a company that is proactive and usually focused on creating a competitive and timed environment for the seller, with the goal of optimizing the value and reaching the seller’s objectives. Unlike passive processes used by business brokers (listings), the actively managed process of M&A advisors often adds significant value to the transaction in many areas. The seller should look at fees not as a cost, but as an investment with an expected return. See more here: Value of an Investment Banker in the M&A Process Value of an Investment Banker in the M&A Process Why do you need an M&A Advisor? There is often a great deal of debate when considering to engage with an Investment Banker / M&A Advisor when it comes to selling your company. To have achieved enough success and growth to consider selling, companies must already be helmed by intelligent, problem-solving individuals. As such, selling your company is often looked at as another goal easily achievable by your world-class team, begging the question; will an investment banker provide value, or are you better off navigating these waters alone? M&A is an incredibly complex process with lots of twists and hidden pitfalls that can make the process much more difficult, and potentially catastrophic if not managed properly. As middle-market companies are an extensive portion of global commerce, it is critical to understand this market well. Many sellers who approach this process on their own lack an understanding of the transaction process, do not have an in depth understanding of the market value components of their business, which can easily become detrimental to the sale process.  In a recent study conducted by Michael B. McDonald, a professor of finance at Fairfield University, 85 business owners who had sold middle market companies for amounts ranging from $10 million to $250 million in the last five years were surveyed. Of respondents, 69% of owners who sold their business with an investment banker said yes, they provided significant value. All in all 100% of business owners surveyed found considerable value when engaging an investment banker. The report also states: "Regular users of middle market investment banking firms such as private equity firms are convinced of investment bankers’ value as virtually all private equity firms hire investment bankers when selling their portfolio companies." Investment bankers consistently provide value to your transaction, but in what way? M&A advisors serve as a guide throughout the deal process, managing the transaction at every stage to ensure you yield the best value for your company. In the same study, business owners scored the following eight services provided by investment bankers as most valuable:  Study conducted by Michael B. McDonald, a professor of finance at Fairfield University #1: Managing the M&A process & strategy.
Nearly all business owners say managing the complex M&A process is the most valuable service the banker provides. Solid and experienced investment bankers establish a thorough process and a strategy to execute, keeping in mind your goals and constraints; including a go-to-market plan, constructively documenting and presenting your company, negotiating best structure and key terms of the transaction, providing oversight and advising on all aspects of documentation, managing and negotiating all ancillary (yet very important) elements of the transaction, due diligence management and managing a timeline. When a buyer is engaged, the banker then structures the transaction to ultimately suit you and your company. Without this disciplined process, you may often wonder if the best offer was obtained. #2&4: Structuring and negotiating the transition. Managing this complex process is one of the most valuable services a banker provides, which includes structuring all points of the transition. With a myriad of experience, bankers negotiate on your behalf to achieve objectives and limit potential risks, thus significantly increasing the probability of a successful close. In developing this balanced solution, sellers often gain significant benefits beyond a successful closing, such as preferential tax treatment or ensuring intangibles for the business owner like retention of key staff, additional earn outs, bonus programs, and more. #3&5: Allowing owners and management to continue to focus on their business. M&A is a lengthy, complex process that easily becomes all consuming. Bankers manage the entirety of the process, allow you to focus on your company success during transition and do what is right for your team. A good advisor will learn and understand your business, and coach you through the complex process. #6: Establishing seller credibility. Most first-time sellers do not know the true value of their business, so the involvement of a banker often creates credible information and a clearer expectation of valuation; 84% of business owners in Dr. McDonald’s previously mentioned study found their final sale price was equal to or higher than the initial price estimated by the banker. By engaging with an advisor you level the playing field by placing yourself on the same plane as professional buyers. #7: Preparing the company for sale and coaching you through the sale process. As the seller you are able to step back from negotiations when engaging an investment banker to manage a sale process. Using a banker to lead often difficult negotiations gives you the ability to maintain a positive working relationship with your buyer. This is imperative, as this relationship is often long lasting; if a seller takes on these negotiations themselves this relationship can often begin strained. Bankers protect the seller from potentially contentious deals while coaching you through the process to ensure your company is purchased for full valuation. #8: Engaging and identifying the best buyer. It is interesting that the study found this item lowest on the list for the 85 companies surveyed. Often a seller will start here with this as their number one priority [find me a buyer at the highest price!], but quickly learns that it is a deep understanding of your business and a professionally run process, complemented with a solid structure of the deal that yields the best result short and long term. M&A advisors enter every transaction with a wide network of professional contacts, industry databases, extensive research, and wide networks of relationships. By understanding your business, your desires & values, and overall objectives for your company, they pair these requirements with an audience of credible buyers sharing similar goals. This allows the advisor to successfully identify buyers and manage a competitive bidding process, inevitably maximizing the shareholder value and ensuring a strong partnership. The more complex your business and the market is, the more critical the need for an aligned M&A Advisor becomes. "Mergers are like marriages. They are the bringing together of two individuals. If you wouldn't marry someone for the 'operational efficiencies' they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?" - Simon Sinek For both business owners and advisors alike, managing the M&A process and strategy is considered the most valuable service an advisor can provide. You can be assured that as a business owner you are making a valuable investment when engaging with an investment banker. Leveling the playing field between buyers and first time sellers ultimately leads to a more effective negotiation, amicable transition, and more value (tangible & intangible) for your company. Not all business owners need to use an investment banker, but the benefits one can provide are indisputable. Types of Buyers for Technology Companies
"When you have mergers and acquisitions that improve the quality of your product, the ability to grow and bring better efficiency, it's good for all." – Roger Agnelli Strategic Buyers: Strategic buyers are more often than not core industry players in the tech world. They are looking to expand their businesses or are seeking companies that would compliment their existing business; the companies they desire are generally aligned with their existing business. When seeking new opportunities, these buyers measure the deal & valuations by what they’d gain strategically through the acquisition. Reasons for acquisition could be anything from an increase in market share, incorporating a new technology, gaining access to a wider customer base, growing a tangential market, or growing their business vertically in the supply chain.
Financial Buyers: Financial buyers' interests are strictly in growing their financial position. When examining a company they focus on operational efficiency, market stability, and growth potential. These factors can determine future success, and give indication of a solid and profitable company. These types of buyers are generally private equity groups or family offices. Since they have obligations to individual investors (the PEG's funders), they seek out different success metrics targeting annual returns on their investments. Private Equity Groups operate with a buy, grow, sell, philosophy, intending to sell following a 3-7 year hold period filled with growth and a strong return. Family Offices focus on similar values but often have no obligations for an annual return on investment or a sell time frame. Their intent is to preserve and grow family wealth under a specific value philosophy. Positively, these buyers provide financial oversight but continue to rely on existing (or new) management to run and grow the business. Business owners are often kept on for a period to run the company under new ownership, carrying the business post sale for a share of interest. For example, a private equity firm may have expanded its holding base by acquiring both an auto parts manufacturing company and an oil & gas services company. This allows them to be stakeholders across the several disparate industries, investing in sectors they know and in companies which have a solid value base, thus allowing them to diversify their holdings to mitigate risk exposure. Financial Buyers with a Strategic Vein: These buyers operate with a philosophy that is a mix of both financial insight and strategic business. Often they are private equity groups or investment firms that take a stronger initiative in growing and building the company. Strategic financial buyers understand it takes time and capital to aggressively grow a business. Through a platform company, they grow organically and acquire based on strategic synergies in market expansion, technology, or vertical integration. Financial backing through an investment firm makes this growth possible. The objective for these buyers is to grow for mass, focusing not on short-term annual return metrics but on building overall revenue & market share. This growth can happen through additional ‘add-on' acquisitions as well as inserting aggressive capital supporting organic growth. Often the process entails running at a financially break-even pace to grow market share and revenue, then transforming the company to one that is highly profitable (through operational efficiencies) and positioning the company for sale to next level of investor.
Individuals:
Individual buyers are backed by small groups of targeted investors (often referred to as Search Firms). These firms search for small businesses within their industries of expertise to team up with and grow. The buyer then purchases the company with financial partners with the intent to later exit. In the search to sell your company, particularly in software and technology, it is imperative to be cognizant of the types of buyers, why they buy, and what it means for you and your company. It is imperative to not rules out one type during a sales process, allowing your advisor to vet out the opportunities, as they may come from unexpected angles. This streamlines conversations with M&A advisors, easing stress and promoting a common language as you navigate these rocky waters together. With the right advisor and right buyer, you’ll be set for success. Early Stage Corporate Development & Strategic Positioning
Often, early stage technology companies rarely ask these questions, or have a concrete answer to them from an organizational development standpoint. What is the overall objective - Building a lifecycle company? Building near-term profitability? Building overall shareholder value? Build great tech ‘and they will come’? The key for an early stage technology company is mitigating risk, especially the risk of burning through seed money before reaching primary milestones. Over time, hundreds of technology companies with extreme promise have missed their opportunity for growth by not asking these questions or contracting someone with industry insight to drive the mission forward. Have you established the milestones for your money use? Founders often are brilliant leaders, collecting a team of experts in the industry to created groundbreaking product. Unfortunately, more often than not, this all-star team lacks significant business experience in positioning the early stage company properly for:
To close that gap, founders and management teams need to assess a myriad of insights into the current technology market. One must leverage data and fact-based market analysis, perform extensive research and in-depth analysis along with providing a competitive market analysis to develop best in class insights driving strategy and execution. Working very closely with businesses to determine their individual goals and success metrics, TKV-6 supports the development and implementation of business growth strategies. Becoming an adjunct to internal management, we vet strategies, build business profiles and plans, position the company for near term growth and long-term shareholder value, ideally leading to a technology platform driven exit. Our team of experts can quickly frame and assess a client’s opportunity(s), and challenges, accelerating the process to convert strategic insight into action.
TKV-6 Strategies has a proven success rate with early stage companies, strategically positioning them for market entry, capital infusion, and near term growth, all leading to an ideal path culminating in a successful early stage market exit. If you are launching a new company or offering and seeking proven experience in positioning for accelerated growth, ask us about our early stage process. With our 20+ years of experience creating ample opportunities for dozens of companies, TKV6’s flexible process yields best in class insights driving strategy and execution.
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