Curious - it seems that the cost out play book for Vista and Thoma usually apply to enterprise SaaS and getting underperforming businesses to 35-40% margins. Is there a precedent of sponsors buying SMB SaaS businesses and getting them to 35-40 margins?
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Based on the most helpful WSO content, achieving over 30% margins for SMB SaaS businesses is possible, but it depends on the specific dynamics of the business. While the cost-out playbook often applies to enterprise SaaS, there are precedents for sponsors targeting SMB SaaS businesses and improving margins significantly.
Key factors include: 1. Cost Structure Optimization: SMB SaaS businesses often have high R&D and S&M (Sales & Marketing) expenses. Sponsors can reduce these costs by streamlining operations, focusing on core markets, and improving sales force productivity (e.g., ramp time, quota attainment). 2. Retention and Growth: High customer retention (90%+ gross retention) and efficient customer acquisition (low CAC) are critical. Sponsors often look for businesses with sticky products and opportunities for upselling or cross-selling. 3. Scaling Opportunities: Sponsors may consolidate SMB SaaS businesses into a platform, leveraging economies of scale to improve margins. 4. Examples: Sponsors like Vista and Thoma Bravo have successfully applied these strategies to smaller SaaS businesses, though the margin improvement trajectory may vary depending on the starting point and market conditions.
While enterprise SaaS businesses often have a clearer path to 35-40% margins, SMB SaaS businesses can achieve similar results with the right operational improvements and strategic focus.
Sources: SaaS LBO, PE recruiting technical questions (software specific), Millionaire by 30, PE recruiting technical questions (software specific), How do you nail the "wow factor" in a pitch?
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I’m sure there are examples but it’s a tougher model to execute on given the nature of selling to and retaining SMB customers vs enterprise customers.
Gotcha - do you have any examples in mind?
Maybe something like Bullhorn (staffing/recruiting agency software)?
I know numerous $5m ARR businesses that run at 40%+ EBITDA margins. It's easily possible, even moreso with AI tools nowadays. It just depends on the company's product type and customer base.
Fair, although those are often under-invested founder-owned businesses (i.e., lots of c-suite gaps, often underpaid family members in key roles, limited S&M investments, etc.), so the EBITDA margins are inflated.
Well how about Fortnox then? Geared toward SMBs, $4bn market cap, 52% LTM EBITDA margin
I mean sure some are, others are just super lean and have a limited TAM so they can focus on optimizing without being concerned about how to reach 100m ARR.
I can't comment on how often this is achieved but I once worked with a P&C insurance core software business that was spitting off $1M EBITDA in $3M revenue. Nothing high tech either, and relatively small customers.
That's literally the entire model of Constellation Software
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