Private Equity
February 22, 2023

Beyond EBITDA: The Growing Importance of Adjusted Metrics in M&A

Beyond EBITDA: The Growing Importance of Adjusted Metrics in M&A
Private Equity
February 22, 2023

Beyond EBITDA: The Growing Importance of Adjusted Metrics in M&A

Ignacio Gassó
Co-founder & Chief Operation Officer
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In the world of private equity, measuring and monitoring performance is key. Luis, in his response, sheds light on the metrics that his private equity fund uses to measure performance internally and externally. While every PE firm has its own benchmarks and metrics, Luis shares some of the most important metrics that they track to ensure that they are delivering on their investment objectives.

One of the most critical metrics in the software-as-a-service (SaaS) business is retention. Luis mentions that they have multiple dimensions to measure retention, including gross retention and net retention. Net retention is particularly important because it shows how much the business is growing from its existing customer base. As it is generally cheaper to retain existing customers than acquire new ones, a high net retention rate is an excellent indicator of a company's growth potential.

Another crucial metric is new bookings. Luis explains that they measure their pipeline metrics, customer acquisition costs (CAC) ratios, lifetime value (LTV), and annual contract value (ACV) growth rate. These metrics allow them to monitor their sales and marketing effectiveness and understand how the business is growing.

Luis also mentions a couple of SaaS-specific metrics, including the SaaS quick ratio and the magic number. These metrics help to proxy growth and allow the PE firm to track how the business is growing over time.

While growth is important, Luis notes that growing profitably is equally crucial. Metrics like EBITDA, margins, and other profitability metrics are becoming increasingly important. Luis explains that adjusted EBITDA is particularly crucial in M&A transactions, as it allows the firm to account for one-time costs and expenses.

In conclusion, Luis emphasizes that the key to effective performance measurement is having a comprehensive set of metrics that cover all aspects of the business. By tracking metrics across multiple dimensions, PE firms can get a better understanding of how the business is performing and take appropriate action to drive growth and profitability.

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