Learn how to use ratio analysis for M&A deal evaluation and screening. In this guide, you will learn how to screen acquisition targets using key SaaS ratios, adjust financial statements to get accurate numbers, and build realistic projections that show potential value creation opportunities.
Introduction
“Wait—these numbers do not add up,” I said, staring at my laptop screen in our war room at 2 AM.
Three weeks into due diligence on what seemed like a perfect SaaS acquisition, we had discovered the target’s reported customer acquisition costs were masking a troubling trend.
When properly analysed through ratio analysis, their unit economics were deteriorating rapidly—a detail their glossy pitch deck had conveniently omitted.
In our first article, “The Ratio Analysis Toolkit for M&A — Concepts Demystified,” I explored the foundational knowledge of ratio analysis in mergers and acquisitions.
I discussed:
- how M&A ratio analysis differs from standard financial analysis,
- when to apply these tools throughout the deal lifecycle,
- the four essential ratio categories (profitability, leverage, efficiency, and liquidity), and
- how to make critical adjustments unique to transaction scenarios.
But understanding concepts is only half the journey.
The real challenge lies in applying them during the pressure and complexity of an actual deal.
That is why, in this article, I am inviting you into the deal room to witness ratio analysis in action through a hypothetical yet realistic transaction: Horizon Capital Partners, a U.S.-based private equity firm, is considering the acquisition of CloudServe Solutions, a growing Indian SaaS company.
Through this narrative case study, you will experience how ratio analysis drives decision-making at each stage of the M&A process.
You will see exactly how an experienced deal team:
- Uses ratio screening to identify promising acquisition targets
- Applies ratio analysis to uncover hidden value and risks during due diligence
- Creates meaningful pro forma adjustments and realistic synergy projections
- Identifies negotiation leverage points through targeted financial analysis
- Makes data-driven decisions that determine whether a deal succeeds or fails
As someone who has advised multiple acquisitions, I can tell you that the difference between deal success and disaster often comes down to how well you apply ratio analysis in real-world conditions, where information is incomplete, time is limited, and millions of dollars hang in the balance.
So, let us begin the journey through this hypothetical deal, where I will show you exactly how ratio analysis transforms from a theoretical framework to a practical deal-making tool.
Deal background: buyer, seller, and industry context
The conference room at Horizon Capital Partners’ New York office buzzed with energy as the investment committee gathered to review potential targets for their newest fund. David Chen, Managing Partner, stood at the head of the table.
“Our new $500 million fund needs to deploy capital within sectors showing resilience even in uncertain economic conditions,” David explained.
“The B2B SaaS space in emerging markets—particularly India—offers compelling opportunities with strong growth, reasonable valuations, and potential for operational improvements.“
Meet the buyer: Horizon Capital Partners
Horizon Capital Partners is a mid-market private equity firm with $1.8 billion under management across three funds. Their investment strategy focuses on:
- Acquiring majority stakes in technology companies with $10-50 million in annual revenue
- Target companies with established product-market fit but needing operational optimisation
- Holding periods of 4-6 years with a target IRR of 25%+
- Value creation through margin improvement, geographic expansion, and add-on acquisitions
“Our financial criteria for this deal are strict,” said Priya Sharma, Horizon’s Principal leading the India initiative.
“We are looking for companies showing at least 20% annual revenue growth, gross margins above 70%, and opportunities to improve EBITDA margins to 30%+ during our holding period.“
Meet the seller: CloudServe Solutions
CloudServe Solutions is a seven-year-old SaaS company headquartered in Bangalore, India, with a development center in Pune and a small sales office in San Francisco. The company provides cloud-based supply chain management software to mid-sized manufacturing companies.
Let’s look at the key financial definitions:
- ARR (Annual Recurring Revenue): Annualised value of subscription-based contracts, excluding one-time implementation fees and professional services
- Normalised EBITDA: EBITDA adjusted to remove one-time items, founder-specific expenses, and non-market rate transactions
Founded by Vikram Mehta (CEO) and Arjun Reddy (CTO), CloudServe has grown to $18 million in reported annual revenue (including one-time fees) with 120 employees. Their journey includes:
- Bootstrap phase (2018-2019): Initial product development
- Seed funding (2020): $2 million from Indian angel investors
- Series A (2022): $8 million led by an Indian venture capital firm
- Current situation (2025): Seeking exit options as founders wish to transition
“The founders built impressive technology, but they are engineers at heart,” noted James Wilson, Horizon’s Operating Partner. “Their financials show they have underinvested in sales and marketing while overbuilding engineering. This creates potential for significant value creation through operational restructuring.“
Industry context: B2B SaaS in India
The Indian SaaS landscape in 2025 presents unique characteristics that directly impact valuation multiples and ratio expectations:
“For this case study, we are assuming India-based SaaS companies with global clients typically trade at 6-8x ARR for mid-market firms with established product-market fit,” explained Priya during her market overview.
“This compares to 10-12x for similar U.S.-based companies in our hypothetical market scenario—creating an arbitrage opportunity for buyers like us.“
The key industry trends influencing this transaction include:
- Increasing competition is forcing higher customer acquisition costs industry-wide
- Growing preference for verticalised SaaS solutions over horizontal platforms
- Rising talent costs in Indian tech hubs are narrowing the labor arbitrage advantage
- Expanding enterprise adoption of cloud-based supply chain solutions post-pandemic
“CloudServe’s industry position is interesting,” added James. “They have developed deep functionality for manufacturing supply chains—a growing vertical—but have not fully monetised their competitive advantage.“
The deal opportunity
CloudServe’s founders have engaged an investment bank to explore strategic options, with an initial asking price of $144 million (8x reported ARR).
“This initial price assumes premium SaaS multiples that the company needs to justify,” Priya commented. “Our job is to determine what CloudServe is actually worth based on its financial performance, not industry hype.”
Horizon’s potential investment thesis centers on:
- Professionalising CloudServe’s sales and marketing to accelerate growth
- Improving operational efficiency through better financial controls
- Expanding customer base in North America through Horizon’s network
- Potential bolt-on acquisitions of complementary technologies
- Exit to strategic buyer or larger PE fund within 5 years
“If our ratio analysis confirms the opportunity, we could offer a purchase price between $90-110 million, representing 5-6x true ARR,” said David. “But first, we need to see if the numbers support this hypothesis.“
Initial screening using ratios
“Before we commit significant resources to due diligence, we need to determine if CloudServe meets our baseline investment criteria,” Priya explained to the associates gathered in Horizon’s analysis war room.
“We will use a targeted set of SaaS-specific ratios to screen this opportunity efficiently.“
James nodded in agreement. “In my experience, thorough initial screening saves weeks of wasted effort. Let us focus on four key areas: growth efficiency, unit economics, retention metrics, and capital efficiency.“
The SaaS ratio screening framework
Unlike traditional industries, where standard EBITDA multiples might suffice for preliminary screening, SaaS businesses require specialised ratio analysis.
Horizon’s team developed a comprehensive screening framework:
“For technology acquisitions, particularly SaaS, we need to look beyond traditional ratios,” Priya explained to the junior analysts.
“We have developed a screening matrix specifically for SaaS businesses that focuses on sustainable growth indicators.“
Important context: The benchmarks used below are based on industry observations for mid-market B2B SaaS companies with established product-market fit. Early-stage companies may prioritise growth over profitability, while enterprise-focused firms may have different benchmark ranges.
A. Growth Efficiency Ratios
“Growth at any cost is not what we are after,” James emphasized. “We want efficient growth that can continue after acquisition.“
The team calculated these critical ratios:
1. Rule of 40 Score = Revenue Growth Rate + EBITDA Margin
- CloudServe calculation: 32% growth + 15% EBITDA margin = 47%
- Benchmark: >40% considered healthy for mid-market B2B SaaS companies with established product-market fit
Note: This benchmark varies by company stage—early-stage firms may achieve high Rule of 40 scores primarily through growth, while mature companies balance growth and margins
2. CAC Payback Period = Customer Acquisition Cost ÷ (Annual Contract Value × Gross Margin)
- CloudServe calculation: $42,000 ÷ ($72,000 × 76%) = 7.7 months
- Benchmark: <12 months considered strong for mid-market B2B; enterprise SaaS may have 18-24 months due to longer sales cycles
3. Sales Efficiency Ratio = Net New ARR ÷ Sales & Marketing Expense
- CloudServe calculation: $4.3M ÷ $3.2M = 1.34x
- Benchmark: >1.0x indicates efficient growth
“Their Rule of 40 score exceeds our threshold, which is promising,” noted Priya. “But I am particularly impressed by their CAC payback period—under 8 months is excellent for B2B SaaS.“
B. Unit economics ratios
“Unit economics tell us if each customer relationship is fundamentally profitable,” explained James. “No amount of scale can fix poor unit economics.“
The team examined:
1. LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
- CloudServe calculation: $216,000 ÷ $42,000 = 5.1x
- Benchmark: >3x indicates healthy unit economics; >5x considered strong
2. Gross Margin Trend
- CloudServe calculation: 73% (2023) → 74% (2024) → 76% (2025)
- Benchmark: Stable or improving margins above 70% for SaaS
3. Average Revenue Per Account (ARPA) Growth
- CloudServe calculation: $63K (2023) → $67K (2024) → $72K (2025)
- Benchmark: Consistent ARPA growth indicates pricing power
“Their unit economics appear solid on the surface,” Priya observed. “The improving gross margin is particularly encouraging—suggests they’re achieving economies of scale.“
C. Retention metrics
“In SaaS, retention is the foundation of valuation,” James emphasized. “Small changes in churn have massive impacts on customer lifetime value.”
Key retention ratios calculated:
1. Logo Retention Rate = (Starting Customers – Churned Customers) ÷ Starting Customers
- CloudServe calculation: (221 – 18) ÷ 221 = 91.9%
- Benchmark: >90% considered strong for mid-market B2B SaaS
2. Net Revenue Retention Rate = (Starting ARR + Expansion – Contraction – Churn) ÷ Starting ARR
- CloudServe calculation: ($14.8M + $1.9M – $0.5M – $1.1M) ÷ $14.8M = 102%
- Benchmark: >100% indicates expansion exceeds churn; best-in-class exceeds 110%
3. Expansion Revenue Ratio = Expansion ARR ÷ Starting ARR
- CloudServe calculation: $1.9M ÷ $14.8M = 12.8%
- Benchmark: >10% suggests strong upsell/cross-sell motion
“Their retention metrics are solid but not exceptional,” noted Priya. “Net revenue retention above 100% is good, but the best SaaS companies exceed 110%. This suggests room for improvement in their customer success function.“
A. Capital efficiency ratios
“How efficiently the business converts investment into growth is crucial for our return profile,” explained James.
The team analysed:
1. Burn Multiple = Net Cash Burn ÷ Net New ARR
- CloudServe calculation: $1.2M ÷ $4.3M = 0.28x
- Benchmark: <0.5x indicates highly efficient growth
2. Magic Number = (Current Quarter Revenue – Previous Quarter Revenue) × 4 ÷ Previous Quarter Sales & Marketing Expense
- CloudServe calculation: ($4.7M – $4.2M) × 4 ÷ $0.8M = 2.5x
- Benchmark: >1.0x considered efficient customer acquisition
3. EBITDA Margin Trend
- CloudServe calculation: 8% (2023) → 12% (2024) → 15% (2025)
- Benchmark: Consistent improvement toward 20%+ long-term
“Their capital efficiency metrics are impressive,” James remarked. “A burn multiple under 0.3 shows they’re generating meaningful growth without consuming excessive capital—a positive sign for potential returns.“
B. Department ratio analysis: Identifying operational inefficiencies
Beyond company-wide metrics, Horizon’s screening included department-level ratio analysis to identify specific operational improvement opportunities.
“Department-level ratios often reveal the most actionable insights,” Priya explained. “By comparing CloudServe’s functional metrics against SaaS benchmarks, we can quantify value creation opportunities.“
Ratio Comparison Table
| Department | Metric | CloudServe | Industry Benchmark* | Variance |
| Sales & Marketing | S&M as % of Revenue | 18% | 25-40% | Underinvestment |
| Sales Productivity (ARR per rep) | $900K | $800K-$1.2M | Within range | |
| MQL Conversion Rate | 9% | 12-15% | Below benchmark | |
| R&D | R&D as % of Revenue | 25% | 15-20% | Over-investment |
| Developers per $1M ARR | 3.8 | 2.0-2.5 | Excessive | |
| Feature Release Cadence | Quarterly | Monthly | Below benchmark | |
| G&A | G&A as % of Revenue | 18% | 12-15% | Above benchmark |
| Revenue per Employee | $150K | $180K-$220K | Below benchmark | |
| Finance Team Size | 6 | 3-4 | Over-staffed |
*Industry benchmarks based on mid-market B2B SaaS companies with $10-50M ARR
“These departmental ratios confirm our hypothesis,” noted James. “They have overinvested in engineering while underinvesting in sales and marketing. And their G&A costs suggest administrative inefficiencies we could streamline.“
Initial screening conclusions
After completing their ratio analysis, Horizon’s team assembled their findings in a screening summary for the investment committee:
“Our initial screening reveals CloudServe as a fundamentally sound business with several promising characteristics,” Priya reported.
“Their impressive growth efficiency and solid unit economics suggest a quality SaaS business. However, we have identified significant optimisation opportunities, particularly in sales/marketing investment and R&D efficiency.“
Here are some of the key screening Insights: –
- Strengths confirmed through ratio analysis:
- Strong Rule of 40 score (47%) indicates balanced growth and profitability
- Efficient customer acquisition with 7.7-month CAC payback
- Improving gross margins reaching 76%
- Net revenue retention above 100%
- Extremely capital efficient with 0.28x burn multiple
- Potential red flags requiring further investigation:
- Engineering headcount appears excessive relative to revenue
- Sales and marketing investment is significantly below SaaS benchmarks
- Net revenue retention, while positive, lags best-in-class SaaS companies
- G&A staffing suggests potential administrative bloat
- Value creation opportunities identified:
- Optimising R&D spend could improve EBITDA by 5-7 percentage points
- Right-sizing sales and marketing investment could accelerate growth
- Improving net revenue retention to 110 %+ would significantly increase LTV
- Streamlining G&A functions could improve operational efficiency
“Based on this initial screening, I recommend proceeding to preliminary due diligence,” concluded Priya. “The ratios support our investment thesis that CloudServe is fundamentally sound but operationally inefficient—exactly the kind of opportunity our playbook can optimise.“
David nodded in agreement. “The initial ratio screening suggests a potential value range of $90-110 million would be appropriate, assuming our deeper diligence confirms these findings. Let us prepare a preliminary term sheet and request access to their data room for the next phase of analysis.“
With initial screening complete, Horizon’s team prepared to dive deeper into CloudServe’s financials, armed with a clearer understanding of what to investigate during comprehensive due diligence.
Pro forma adjustments and synergy expectations
“Based on our initial ratio screening, CloudServe shows promise, but we need to validate our findings with deeper analysis,” Priya explained as Horizon’s team gained access to the data room.
“Now we will move from screening ratios to building a realistic pro forma model that addresses the specific opportunities and concerns we identified.“
James nodded, reviewing their initial findings. “Our screening showed strong unit economics but suggested operational inefficiencies in R&D and sales. These are exactly the areas where we need to quantify potential improvements through precise adjustments and realistic synergy projections.“
The team was particularly focused on the department-level ratio anomalies they had discovered during screening—the excessive engineering headcount relative to revenue and the inadequate sales and marketing investment.
“Pro forma projections are where deal success is made or broken,” James continued. “If we are disciplined here, we avoid the classic PE mistake—paying for synergies we cannot realise.“
Normalizing the financial statements
The first step in Horizon’s due diligence process involved normalising CloudServe’s historical financials to provide a true baseline for forecasting.
“Before we can project the future, we need an accurate picture of the present,” Priya told the deal team. “That means adjusting historical financials to reflect sustainable business performance under applicable accounting standards.“
The due diligence team identified several necessary adjustments:
A. Revenue normalization
“We have identified some one-time implementation fees being counted as recurring revenue,” noted Alex, the financial analyst. “Under ASC 606 revenue recognition standards, we need to separate these for accurate SaaS metrics.“
Revenue Normalization Calculation:
Original reported 2025 Revenue: $18.0 million
Adjustments:
- One-time implementation fees* -$1.1 million
- Multi-year contract acceleration** -$0.4 million
Normalised 2025 ARR: $16.5 million
“This 8.3% reduction in normalized revenue significantly impacts our valuation range,” noted Priya. “At an 8x multiple, this adjustment alone reduces value by $12 million.“
B. Expense normalization
“We have found several expense items requiring adjustment,” Alex continued. “Some are founder-related, while others represent unsustainable spending patterns.“
EBITDA normalization summary:
| Adjustment Category | Amount | Rationale |
| Executive Compensation | +$400K | Founders’ compensation ($950K) vs. market rate ($550K) |
| Related-Party Lease | +$120K | Office lease from founder entity above market rate |
| R&D Capitalisation | -$630K | Adjusted from 40% to 25% capitalisation rate per IAS 38* |
| Net EBITDA Impact | -$110K | Total adjustment to normalised EBITDA |
*IAS 38 requires that only development costs for commercially viable products meeting specific criteria can be capitalised. The 25% rate aligns with industry practices for mid-market SaaS companies.
C. Normalized 2025 financial summary:
- Normalised Revenue: $16.5 million
- Normalised EBITDA: $2.59 million (15.7% margin)
- Previous Reported EBITDA: $2.7 million (15.0% margin on $18M revenue)
Working capital adjustments
“Working capital analysis revealed concerning trends,” noted James. “Their reported metrics masked underlying inefficiency.”
A. Days sales outstanding (DSO) analysis:
DSO Calculation: (Accounts Receivable ÷ Daily Revenue)
Looking at the historical trend:
- 2023: 45 days
- 2024: 62 days
- 2025: 78 days
Industry Benchmark: 55 days for mid-market B2B SaaS
Cash Flow Impact Calculation:
- Daily Revenue = $16.5M ÷ 365 = $45,200
- DSO Improvement = 78 days – 55 days = 23 days
Working Capital Release = $45,200 × 23 = $1.04 million
B. Additional working capital items:
- Deferred revenue adjustment: $680,000 reduction in 2025 revenue to align with conservative recognition practices
- Impact: This affects reported revenue timing but not underlying ARR
“These working capital adjustments have significant implications for cash flow,” James explained. “To realise the $1.04 million DSO improvement, we will need to implement stricter collection policies. However, this may strain customer relationships and require careful implementation.“
Building the Pro Forma Model
With normalized historical financials established, Horizon’s team constructed a comprehensive five-year pro forma model incorporating both organic improvements and acquisition-specific changes.
“Our pro forma model must realistically capture both the standalone trajectory and the impact of our operational improvements,” explained Priya. “This provides the foundation for our valuation and return analysis.”
A. Revenue Projections
The team modeled three growth scenarios based on CloudServe’s historical 35% CAGR and industry trends:
Growth rate assumptions & rationale:
| Year | Base Case | Rationale |
| Year 1 | 25% | Integration challenges + shift to enterprise sales |
| Year 2-3 | 28% | Enhanced sales investment + market expansion |
| Year 4-5 | 22% | Market maturation + competitive pressure |
| Terminal | 15% | Long-term sustainable growth rate |
Upside Scenario: Growth rates 5-8 percentage points higher (assumes successful enterprise penetration)
Downside Scenario: Growth rates 8-12 percentage points lower (assumes integration difficulties)
“The base case scenario shows CloudServe reaching $44.8 million in revenue by exit,” noted Alex. “This represents a 2.7x increase over our five-year holding period.”
B. Margin structure projections
The pro forma model projected significant margin improvements:
Five-year margin progression:
| Expense Category | Current | Year 3 | Year 5 | Improvement Driver |
| Gross Margin | 76% | 80% | 82% | Hosting economies of scale |
| Sales & Marketing | 18% | 30% | 25% | Increased investment then efficiency |
| R&D | 25% | 18% | 15% | Development efficiency improvements |
| G&A | 18% | 14% | 12% | Operational streamlining |
C. Resulting EBITDA Margin:
- Current: 15.7%
- Year 3: 28%
- Year 5: 30%
“These projections show EBITDA expanding from $2.59 million to $13.4 million by exit,” Priya explained. “This represents a 5.2x increase driven by operational improvements.”
Quantifying synergy opportunities
“Synergies must be specific, measurable, and have clear accountability,” James reminded the team. “Otherwise, they are just wishful thinking.“
Horizon’s team identified four categories of synergies with detailed implementation plans:
A. Cost Synergies
Engineering team optimisation:
Current state: 46 engineers (2.8 engineers per $1M ARR)
Target state: 33 engineers (2.0 per $1M ARR – industry benchmark)
Calculation:
- Headcount reduction: 13 engineers
- Average fully-loaded cost: $80,000 per engineer
- Gross annual savings: $1.04 million
- Less: Severance costs: $260,000 (20% of annual savings)
- Net annual savings: $780,000
- Implementation: Phased over 18 months to minimize disruption
G&A Efficiency:
Current State: 6-person finance team + manual processes
Target State: 4-person team + automated workflows
Annual savings breakdown:
- Salary reduction: $120,000 (2 positions × $60K average)
- Process automation savings: $80,000
- Total annual savings: $200,000
- Implementation: 12 months
B. Revenue Synergies
Sales force enhancement:
Investment required:
- Additional sales reps: 4 (from 8 to 12)
- Training and onboarding: $200,000
- Annual compensation increase: $480,000
- Total annual investment: $680,000
Expected returns:
- Ramp period: 9 months to full productivity
- ARR per rep improvement: $900K to $1.2M
- Incremental ARR by Year 3: $1.6 million
- Risk adjustment: 75% probability of success
C. North American Market Expansion:
Investment required:
- San Francisco office expansion: $300,000
- Local sales team (3 people): $420,000 annually
- Marketing programs: $150,000 annually
- Total annual investment: $570,000
Expected returns:
- Target: Increase North American revenue from 45% to 65%
- Incremental ARR by Year 3: $3.2 million
- Risk adjustment: 70% probability of success
Risk-adjusted synergy summary
Total annual EBITDA impact by year 3:
- Cost synergies: $980,000 (85% confidence)
- Revenue synergies: $1.4 million (75% confidence)
- Working capital: $200,000 annually (collection improvements)
- Total risk-adjusted synergies: $2.58 million
“After discounting for execution risk, we project $2.58 million in annual EBITDA improvement by Year 3,” calculated Priya. “This represents 15.6 percentage points of additional EBITDA margin on our projected revenue base.“
Pro Forma financial ratio projections
The team projected key financial ratios for the post-acquisition entity:
A. Leverage Ratios
Debt financing structure:
- Total consideration: $95 million (midpoint of range)
- Debt financing: $52 million
- Equity financing: $43 million
- Debt-to-EBITDA at closing: 4.5x*
*Based on $11.5 million pro forma EBITDA run-rate, including normalised base ($2.59M) plus immediate operational improvements ($8.91M annualised impact from synergies)
Leverage Progression:
| Year | Debt/EBITDA | Interest Coverage | Covenant Limit |
| Closing | 4.5x | 2.8x | 5.0x |
| Year 1 | 3.8x | 3.2x | 5.0x |
| Year 3 | 2.2x | 5.4x | 4.0x |
| Year 5 | 0.9x | 9.6x | 3.0x |
B. SaaS-Specific Ratio Projections
Rule of 40 Progression:
| Year | Growth Rate | EBITDA Margin | Rule of 40 Score |
| Current | 32% | 16% | 48% |
| Year 1 | 25% | 20% | 45% |
| Year 3 | 28% | 28% | 56% |
| Year 5 | 22% | 30% | 52% |
LTV: CAC Evolution:
Current: 5.1x
- Year 1: 4.2x (reflecting increased S&M investment)
- Year 3: 5.8x (improved efficiency + retention)
- Year 5: 6.5x (mature customer success program)
Sensitivity analysis on key assumptions
“Pro forma models are only as good as their assumptions,” cautioned Priya. “We need to understand how sensitive our returns are to key variables.“
A. IRR sensitivity analysis:
| Scenario | Base Case IRR | Growth -5pp | Margin -5pp | Multiple -1.0x |
| Base Case | 31% | 24% | 26% | 25% |
| Churn +2% | 26% | 20% | 22% | 21% |
| Synergy -25% | 28% | 22% | 24% | 23% |
B. Key Insights:
- Growth rate sensitivity: Moderate impact on returns
- Margin improvement: Critical to achieving target returns
- Exit multiple: Significant impact, but the deal remains viable
- Churn rate: Material impact on valuation (LTV: CAC drops from 5.1x to 4.0x)
“This sensitivity analysis gives us confidence in the deal’s robustness,” noted David. “Even in challenging scenarios, we still achieve acceptable returns, provided we execute on core operational improvements.“
Financial strategy corner: Key decision points
A. Critical success factors identified:
- Engineering team reduction must be carefully managed to avoid product disruption
- Sales team expansion requires experienced hires with enterprise selling capability
- Customer success improvements are essential to maintain/improve retention
- Working capital improvements need customer relationship management
B. Risk mitigation strategies:
- Phase engineering reductions over 18 months with retention bonuses for key personnel
- Hire VP of Sales before closing to lead team expansion
- Implement customer success tools and processes in the first 6 months
- Gradual DSO improvement with a customer communication plan
Pro forma and synergy summary
The team concluded their pro forma analysis with a comprehensive executive summary:
“Our pro forma analysis confirms CloudServe represents an attractive investment opportunity when properly valued,” Priya reported to the investment committee. “After normalising financials and building realistic projections, we believe the business supports a valuation range of $90-105 million, representing 5.5-6.4x normalised ARR.“
Key takeaways:
- Normalised revenue is 8.3% lower than reported, significantly impacting valuation
- Operational improvements can expand EBITDA margin from 15.7% to 30% over five years
- Risk-adjusted synergies contribute $2.58 million in annual EBITDA improvement
- Proposed capital structure provides adequate flexibility while maximising returns
- Projected returns exceed our 25% IRR threshold even in downside scenarios
“With this pro forma analysis complete, we are ready to identify specific red flags and negotiation points,” concluded David. “The numbers tell us this is an attractive opportunity at the right price, but execution risk requires appropriate valuation discipline.“
Conclusion: the journey continues
“Great work, team,” David said as they wrapped up their pro forma analysis session. “We now have a solid foundation to build our investment case. In our next meeting, we will tackle the red flags, negotiation strategy, and final decision-making process.”
In this second article of our series, we have stepped into the deal room to witness the first critical phases of ratio analysis in action through Horizon Capital’s evaluation of CloudServe Solutions. We have seen how an experienced deal team:
- Established the deal context by understanding both the buyer’s investment criteria and the seller’s business model within the SaaS industry framework
- Applied initial screening ratios to efficiently evaluate CloudServe’s fundamental performance across growth efficiency, unit economics, retention metrics, and capital efficiency
- Developed pro forma adjustments to normalise financial statements, build realistic projections, and quantify potential synergies
These foundational steps have transformed abstract ratio analysis concepts from our first article into practical dealmaking tools. The Horizon team has progressed from initial interest to a data-driven understanding of CloudServe’s operational reality and future potential.
But the journey of ratio analysis in M&A does not end with identifying opportunities. Some of the most critical work lies ahead as the team must now:
- Identify red flags and risks that impact valuation and deal structure
- Develop negotiation leverage points based on the ratio analysis findings
- Make the final investment decision with a complete understanding of risk-reward tradeoffs
In the next article of our series, we will continue this case study by exploring these crucial final stages of the deal process. You will see how Horizon’s team uses ratio analysis to uncover hidden risks, structure a compelling offer, and ultimately decide whether CloudServe represents a sound investment opportunity at the right price.
Until then, I encourage you to apply the ratio screening and pro forma adjustment techniques we have explored to your own potential transactions. Remember that disciplined ratio analysis early in the deal process builds the foundation for successful outcomes, revealing both opportunities and risks that might otherwise remain hidden until it is too late.
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