How the Ratio of Net New to Upsell Logos Impacts Your Exit Multiple.
You have accumulated a nice collection of recognizable customer logos over the past couple of years. You are getting attention as a possible acquisition from both the strategic and private equity markets. Things are going really well. You are encouraged, and your board of directors agrees to provide at least one interested party some detail on your bookings performance. All of a sudden, the line of questions from a would-be buyer starts to suggest to you that perhaps things are NOT going really well.
Net New Needs to Keep Pace
What got the attention of the acquiring market was that your name kept popping up in competitive sales cycles. Observers did not know exactly what you were accomplishing, but saw that something was happening.
If you can reveal to that interested party that your percentage of net new logos comprises more than 70% of your incremental quarterly bookings, then you are in good shape; however, even if your bookings engine demonstrates growth BUT this exact ratio starts to decline (leaning more toward upsells), you will find the multiple implied in the any type of pricing negotiation will start to go in the wrong direction. Believe it.
What the graphic below shows is not highly scientific, but it is more than notionally correct. It is sort of a rule-of-thumb-type pricing curve where we can see, with some degree of reliability, where a negotiation conversation is headed as the ratio of net new to upsell is revealed.
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As an example, if your percentage of bookings reflecting net new logos is 75% and upsell is 25%, then you have a ratio of 3-to-1. Move right along the X-axis until you find 3.0x and then vertically until you intercept the blue line; at this point, move left horizontally to the Y-axis (i.e. 6.0x).
The market does not exhibit much mercy on this front. If you are below the 3-to-1 ratio, how can you get back up to where you want to be? We have been in this situation; it is more than solvable. Email us at Maximize@MOICPartners.com to set up an initial call.
