Human Resources SaaS Firm

On March 19, 2020, a third party referred Next Bridge Advisors to Hapital, a human resources SaaS company.  The firm sells an annual subscription to its web-based human resources software to midsize and large organizations.  It is wholly owned by its two co-founders, a husband and wife team.  They built a SaaS business within the last decade out of a previous human resources services company they operated.  They wished to explore a sale of the firm because the owners were ready to shift into semi-retirement.

Hapital’s revenue was stable, though not growing.  The owners believed their business had significant growth potential.  They felt that realizing that potential required either a large marketing investment, a larger sales force, or a larger customer base to which to sell their product.

In its present state, Hapital was an excellent lifestyle business.  Including salaries paid to its primary owner, its owners’ discretionary earnings totaled $658k in 2019.  High-margin SaaS-related profit represented 89% of this figure and lower-margin staffing profit represented 11%.  Although there had been bottom-line volatility the past three years, the firm’s low fixed costs allowed it to maintain a significant profit margin even as revenue declined.

Valuation

On April 1, 2020, because it was evaluating the possibility of a sale, Hapital engaged Next Bridge Advisors to perform a valuation.  We conducted a valuation using three methods: discounted future cash flow valuation, comparable transactions valuation, and SaaS valuation.  These methods generated a range of valuations from $2.6m to $3.8m.  Based on our assessment of the relative reliabilities of these valuation methodologies for the business, we calculated a weighted average of the three valuations, resulting in a final valuation of $2.7m.  The valuation was 4.1 times the 2019 owners’ discretionary earnings figure of $658k.  We presented our valuation on April 11, 2020.

Initiating the Sale

Hapital engaged Next Bridge Advisors on April 30, 2020 to begin its sale process.  We believed that there were approximately 100 strategic acquirers in the world that would be able to gain significant value from acquiring Hapital because they were much larger HR SaaS firms with a gap in their offerings that Hapital would fill.  We believed that the firm’s best shot at earning a valuation higher than $3m would be from approaching these firms.  After we advised the owners of the risks and rewards of various approaches, they decided that we should pursue strategic acquirers exclusively and that we should pursue non-strategic acquirers (aka financial acquirers) if our initial approach was unsuccessful

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Strategic Acquirers

We reach out to 166 HR SaaS companies with over $25 million in annual revenue.  Many operated in the same space as Hapital but had a different service offering.  We engaged in dialogue with 68 (41%) of these companies.  Of these 68, several expressed some degree of interest, but only one provided a specific offer.  This offer was unfortunately inadequate.

We provided the owners with an always-available and always-updated report on our activity with all prospective acquirers, their feedback, and their status.

Financial Acquirers

In August 2020, Hapital decided it would like for us to begin considering financial acquirers.  Applying an asking price of $3 million, we began dialogues with financial acquirers on August 20, 2020.  A total of 88 financial acquirers expressed interest.  Although several indicated interest in making an offer below the asking price, only two submitted a letter of intent to acquire Hapital at the asking price of $3 million.  This purchase price was 11% higher than the valuation we presented on April 11.

Of the two letters of intent, one received on September 15, 2020 entailed payment of 90% of the $3 million purchase price at closing and 10% through a seller note to be paid over three years.  The other, received on September 21, conditioned 17% of the purchase price on sustaining revenue for one year.  We negotiated the first letter of intent and reached close to the point of both parties’ signing it.  The most challenging part of the negotiation was allocating Hapital’s several hundred thousand dollars of prepaid revenue between the buyer and seller.  We achieved this by applying FASB (Financial Accounting Standards Board) standards.

Deal on Hold

In October 2020, the owners of Hapital decided to put the sale on hold because they suddenly became aware of a significant delay in the development of the next version of their software. They believed they would be unable to devote sufficient time to transitioning their firm to new ownership while completing that development project. Therefore, a sale would be infeasible before development were complete.