A Take Private Takeoff?
10/20/24 Benchmarks for Operators
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Going Private
Take privates are picking up.
Zuora is the latest example of a big name being de-listed from a stock exchange as part of a purchase by a private equity buyer.
It's becoming increasingly popular for companies to go private, especially when they are trading at “attractive” prices. So what exactly does a take private entail? And why does it happen?
The What
A take private is a transaction in which a publicly-traded company returns to private company status, generally as a result of a sale to one or more financial buyers. The buyer could be a strategic (Salesforce buying Slack), a private equity firm (Thoma Bravo buying Sailpoint), or an eccentric billionaire (Elon Musk buying Twitter).
The Why
There are many reasons why companies might choose to go private. One of the main benefits is that the company is no longer subjected to the scrutiny of being a public company. It’s tough being in the lime light. There are a lot of expectations around performance.
As a private company you can generally operate with less transparency, which may allow you to make decisions more quickly. This can be beneficial if the company wants to pursue a strategy that might not be popular with investors, or take a long time to materialize, such as a re-org.
Going private can also allow the company to take on greater debt, which in turn can provide more money for growth or other purposes, without upsetting the analysts.
Finally, taking a company private can allow the stakeholders to reap the benefits of a company without the cost of keeping everyone up to date. The administrative burden that goes along with reporting quarterly results is huge. There are entire departments of people at public companies focused legal and communication.
Real World Examples
Some of the most well-known companies that have been taken private include Dell, Toys R Us, and Burger King.
In 2013, Dell announced that it would be taken private in a deal worth $25 billion.
Toys R Us was taken private in 2005 in a deal worth $6.6 billion.
Burger King was taken private in 2010 in a deal worth $3.3 billion.
Private Equity Players
Private equity firms are often the ones that take companies private.
Some of the most active private equity firms in this area include Thoma Bravo, Vista Equity, KKR, Carlyle, and TPG Capital.
Together, these 5 firms have been involved in some of the biggest take private transactions in recent years.
Who Could Be Taken Private in 2025?
Potential names that have been floated include:
PagerDuty ($1.8B Market Cap, 3.4x EV / NTM Rev)
Twilio ($11.4B Market Cap, 2.0x EV / NTM Rev)
Dropbox ($8.4B Market Cap, 3.6x EV / NTM Rev)
The biggest potential tailwind for take privates in 2025 - the cost of debt. Many take privates are financed with a heavy dose of IOUs.
In fact, Twitter owes at least $1B annually in interest payments on the $13B in debt required to take it private.
And with each 50 bps drop, take privates become more appealing. Then again, falling interest rates do contribute to the stock market jumps that reduce the number of companies who are targets for take privates… soo….yea.
But, if I was a betting man (disclaimer: this is not financial advice, I just have a degenerate streak and like to watch the ponies run from time to time), I’d say Dropbox. The stock is down 10% year to date and is expecting nearly flat growth over the next twelve months. However, the company generates +35% free cash flow margins at scale and could be taken off the market for under $10 billion.
TL;DR: Multiples are DOWN week-over-week.
Top 10 Medians:
EV / NTM Revenue = 14.3x (-0.2x w/w)
CAC Payback = 17 months
Rule of 40 = 52%
Revenue per Employee = $489K
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 110
Population Sizes:
Security: 17
Database and Infra: 14
Backoffice: 16
Marcom: 16
Marketplace: 15
Fintech: 16
Vertical SaaS: 16
If you’d like the company level metrics used in these reports, upgrade to paid and you can download the excel sheet at the bottom of this post
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency Benchmarks
Companies that can do more with less tend to earn higher valuations.
Three of the most common and consistently publicly available metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.
Here’s how I do it:
Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smooths for seasonality and recognizes the lead time required to generate pipeline.
Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).
Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.
Operating Expenditures
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The most common buckets companies put their operating costs into are:
Cost of Goods Sold: Customer Support employees, infrastructure to host your business online, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools
Research & Development: Product and Engineering employees, development expenses, tools
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”
All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.
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