Payment Integration Trends for Vertical SaaS M&A

A significant trend in vertical SaaS is integrating payment features into existing revenue streams, which may enhance a company's attractiveness for M&A. For founders, evaluating this option is becoming more pivotal for achieving potentially exceptional market outcomes and positioning their companies for potential acquisitions.

While implementation can be challenging, understanding how to effectively incorporate payment functionalities can help provide a competitive edge, enhance the overall value proposition for vertical SaaS companies, and make them more appealing for potential M&A opportunities.

Vista Point Advisors and Utopaya collaborated to address some of the common questions SaaS founders have around this complex topic.

What’s causing the shift in payments dynamics?

The landscape of payment partnerships is evolving. Historically, payment partnerships were hands-off referral models. However, many companies now prefer a hands-on approach to control the customer experience and gain economic benefits, which can potentially boost their valuation for M&A scenarios.

This area is currently not very regulated and founders integrating with traditional payments providers may face challenges like frequent rate increases or confusing statements, which may result in customer dissatisfaction and potential software churn.

To mitigate these issues and help enhance M&A prospects, SaaS companies can take over sales and support functions to create a single point of contact for customers. This approach allows them to control pricing and improve customer experience.

How are SaaS buyers and investors looking at this opportunity?

Investors seem to be increasingly recognizing the value of payment integration in SaaS companies as it could increase revenue in a recurring way, relatively passively, with this high-margin product. The lift in margin can help produce better leverage to invest in future growth organically and fund working capital burdens SaaS businesses normally face. Furthermore, most buyers and investors have experience with payments and can leverage their scale and relationships to often get better rates, furthering the margin expansion.

Historically, investors introduced these services post-transaction, viewing them as value creation levers. However, early involvement during business development can provide more runway to execute strategies or make late-stage adjustments like contract restructuring and modeling to help maximize value. This proactive approach can enhance a company's appeal in M&A discussions.

A typical scenario involves a SaaS business with around $3-5 million in revenue, focused on annual recurring revenue (ARR), but overlooking payment opportunities. Founders should consider when payments occur around their platform and when to partner with a PayFac to monetize these opportunities. As the business scales, they might eventually disintermediate and manage payments independently, which could assist in further boosting their attractiveness to potential buyers or investors.

How can founders quantify their potential payments opportunity?

Quantifying the payments opportunity is crucial, especially when positioning for M&A. It's important to note that this opportunity isn't always correlated with software ARR, but rather with overall payments volume. For example, a vertical SaaS company selling to businesses that accept credit cards, like dental practice management software accepting co-pays or installments for Invisalign, can have significant payment volumes.

A $2 million ARR business might have a substantial payments opportunity, while a $60 million ARR business might not. Generally, if a business has $75 to $100 million in potential payments, it may be worth exploring integration. For smaller volumes, around $20 million, it might not be as beneficial. Different industries also have varying levels of price sensitivity and margin compression as well. Data on average take rates and gross margins by vertical can further refine this assessment.

The key factors are the customers' payment acceptance methods and the volume of transactions. Founders should assess the average annual hard volume per merchant and the number of merchants to size the opportunity, gauge the viability of payment integration, and understand its impact on potential M&A valuations.

How can SaaS companies increase value and improve experiences for customers?

The ultimate goal is to create value for clients. Founders should consider how their payment solutions can enhance the client’s business and be able to demonstrate this value to potential SaaS acquirers. This often involves convincing small business owners to adopt new systems, which can be challenging. Investors often underestimate the complexity of this process, but it’s crucial for successful payment integration and M&A outcomes.

In many businesses, such as dental practices, payment processes are often manual and prone to errors. Staff must reconcile transactions with patient ledgers daily, leading to increased accounts receivable and bad debt. Automating these processes can significantly reduce errors and improve efficiency. For instance, automatic posting of co-pays and enrollment in payment plans can aid in streamlining operations and reduce costs.

Automated payment systems might also enhance the customer experience. For example, in a restaurant, clearing a tab automatically opens up the table for the next customer, improving table turnover and customer satisfaction. Similarly, in healthcare, automated payment plans can help make it easier for patients to manage their bills, potentially leading to higher satisfaction and loyalty.

These improvements not only benefit clients, but can also help make the SaaS company more valuable in the eyes of potential acquirers.

What are common operational challenges to be aware of?

SaaS founders must carefully evaluate the operational hurdles of payment integration. With clients often spending significant amounts on credit card transactions, the challenge lies in moving from established systems to new integrated solutions.

For instance, dental practices already have merchant processing accounts to accept payments. Convincing clients to switch to a new system and then transitioning them can be complex. Founders need to understand the potential difficulties, develop strategies to ease this transition, and be able to showcase this ability as a strong selling point in acquisition talks. Demonstrating expertise in managing this transition can be a key differentiator in M&A discussions.

Companies experiencing rapid growth are more likely to adopt integrated payments during SaaS purchases. Positioning the payment solution as a more integral part of the software can possibly lead to higher adoption rates and, consequently, could increase company valuation. Founders should focus on new clients rather than existing ones, especially if the business is in a growth phase, as this strategy can be more appealing to potential buyers.

How do founders choose the right payment partner to maximize revenue?

Choosing the right payment partner is crucial for successful integration. Founders should be selective to help ensure the partner can support their specific use case and enhance their company's attractiveness to potential acquirers.

This involves understanding the economics of credit card transactions and the fees involved. On average, it costs a merchant around 3% to accept a credit card, with 2% going to the issuing bank and card network. The remaining 1% is the processor's margin, which can be split in various ways depending on the partnership model. For example, in a referral model, the processor might take 60%, leaving 40% for the SaaS company.

To help maximize revenue, SaaS companies can consider insourcing more of the payment process. This involves taking on more responsibilities, such as sales and support, and potentially even underwriting transactions. While this requires more effort, handling most aspects of the payment process means keeping a larger share of the revenue.

By selecting the right payment partner, integrating and automating the payment processes, and supporting customer transitioning, SaaS founders can more successfully navigate the complexities of payment integration, enhance customer experiences, drive growth, and boost M&A appeal.

How should founders position payments for an exit event?

When positioning a vertical SaaS company for an exit event, founders should consider payment integration as a key strategic element. Early involvement in positioning or deploying payment integration during business development provides more runway to refine strategies and help maximize value:

• **Founders who haven't yet incorporated payments: **Highlight the untapped potential revenue gains and how it can be a strong selling point in M&A discussions.
• Founders who have integrated payments but haven't achieved full customer adoption: Focus on highlighting the growth prospects by demonstrating a clear path to increased adoption and revenue, which can aid in boosting company valuation.

Founders should focus on demonstrating the prospective value created through payment functionality, including improved customer experience, increased revenue streams, and solutions to common industry pain points. Additionally, founders should be prepared to present data on payment volumes, take rates, and gross margins to showcase the full potential of the integrated payment solution. This information can help potential buyers or investors understand the full value of the integrated payment solution and its potential for future growth.

By addressing these key aspects of payment integration, vertical SaaS founders can better position their companies for success in the evolving market landscape and potential M&A opportunities.

This material is for informational purposes only. It is educational in nature and not intended to provide specific advice or recommendation of a course of action in any situation. Any examples used in this material are generic, hypothetical, and for illustrative purposes only. Opinions contained herein should not be interpreted as a forecast of future events or a guarantee of future results. Outcomes will vary depending on individual circumstances.

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Vista Point Advisors and Utopaya are not affiliated companies.