Key takeaways
IPO exit lost its power. Software sellers can no longer use the public market threat as leverage.
Buyers hold the cards. Patient acquirers are waiting out sellers anchored to outdated valuations.
Delay favors the buyer. Holding out rarely improves terms when market fundamentals remain unchanged.
AI added pressure, not value. Public investors see AI as a threat to software, not a valuation tailwind.
The new math on software exits
A software founder's best leverage in any acquisition discussion was always the same: the credible threat of going public instead. That threat no longer lands the way it used to.
Public markets have repriced software companies around profitability rather than growth alone, and the resulting compression in multiples has quietly shifted negotiating power toward buyers in ways many sellers have yet to fully absorb.
The IPO alternative isn’t what it used to be
The negotiating dynamic in software M&A has always hinged on alternatives. A seller with a credible path to a public listing could walk away from an underwhelming offer, forcing buyers to compete against a theoretical IPO valuation. That leverage held as long as public investors were willing to pay premium multiples for fast-growing software businesses regardless of profitability.
That's no longer the case. The SaaS Index fell 6.5% in 2025 while the S&P 500 rose over 17%, a divergence that reflects structural repricing rather than cyclical weakness. Median revenue multiples for SaaS companies have compressed from their 2021 peak of roughly 9.8x to approximately 6.1x in 2026. The shift correlates with rising interest rates, which reduced the present value of future cash flows and refocused investor attention on near-term profitability.
Recent IPOs price below expectations
The handful of software companies that have gone public recently illustrate this challenge. SailPoint, the first major enterprise software IPO of 2025, closed down 4.4% on its first trading day, despite strong initial demand. Within four months, shares traded 25% below the issue price. Klarna, once valued at $46 billion before a dramatic markdown, postponed its listing amid tariff-driven volatility and sat 22.6% below issue by late 2025.
The bar to reach public markets has also risen sharply. Successful IPO candidates now need at least $400 million in ARR with 30%+ year-over-year growth—benchmarks set by recent listings like Klaviyo ($600M ARR, 57% growth) and Rubrik ($780M revenue, 47% growth).
For private software companies contemplating exit options, these outcomes matter. The IPO is no longer a reliable escape hatch that buyers must outbid. Instead, it has become a path marked by valuation haircuts and uncertain reception. Buyers know this, and they price accordingly.
What buyers see that sellers often miss
The information asymmetry in software M&A negotiations has widened. Buyers, particularly private equity firms and strategic acquirers with dedicated corporate development teams, track public market comps with precision. They know when a seller's expectations are anchored to a 2021 financing round or a peer transaction from 18 months ago that no longer reflects current market conditions.
Sellers often lack this perspective. A founder who raised a Series C at 15x revenue in 2021 may struggle to accept that comparable public companies now trade at 5x to 7x. The gap between expectation and market reality creates friction that benefits patient buyers.
The cost of patience falls differently
Consider the relative positions. A buyer evaluating multiple acquisition targets faces opportunity cost, but limited carrying expense. If one deal stalls, capital can be deployed elsewhere. On the other hand, a seller faces ongoing operational demands, employee retention pressures, and in the case of PE-backed companies, LP expectations around distributions.
Late-stage software valuations have declined in 2025, alongside public market multiples, and fundraising timelines have lengthened. Companies struggling to raise follow-on capital at acceptable terms face mounting pressure to transact rather than wait.
This environment favors patient buyers. Each quarter of delay adds more data points, and recent data has consistently reinforced lower multiples.
The psychology of lagging expectations
Valuation expectations rarely update in real time. Sellers who raised capital at 2021 multiples often treat those marks as floors rather than snapshots, even when public comps have moved 20-40% lower.
This anchoring effect creates a specific pattern in negotiations. Sellers initially reject offers they perceive as lowball. Time passes. Market conditions remain unchanged or deteriorate. Eventually, the same offer, or a worse one, becomes acceptable by necessity rather than choice.
Advisors face difficult conversations
The Capstone Partners 2024-2025 Global M&A Survey found that "sellers' excessive valuation expectations" ranked as the most prominent hurdle advisors faced in 2024. Nearly all investment bankers surveyed (97%) cited realistic valuation as critical to achieve sell-side success.. The pattern is consistent: sellers who anchored to 2021-era valuations struggled to close deals, while those who recalibrated found buyers willing to transact.
By 2024, a "healthy tension" had emerged as both sides adjusted expectations, with the "bid-ask spread" evolving from a chasm to manageable differences. Creative deal structures, including earnouts and seller notes, have become more common to bridge remaining gaps.
Sellers who accepted current conditions found buyers. Those who held out faced what Bain's 2025 M&A Report described as a market where "buyers still skeptical on price and sellers reluctant to move too soon" resulted in prolonged stalemates rather than improved terms.
Why AI hasn't changed the math
Many expected artificial intelligence to provide a tailwind for software valuations. The logic seemed sound: AI capabilities would enhance existing products, create new revenue streams, and justify renewed premium pricing. However, the market has treated AI as a risk factor rather than a growth catalyst.
Public investors have grown increasingly concerned that AI may disrupt traditional software business models rather than enhance them. Morningstar analysts point to fears that AI could undermine per-seat licensing, shifting revenue toward less predictable consumption-based models. Adobe and Salesforce each declined roughly 20% in 2025 despite continued revenue growth.
The commoditization concern
The deeper worry involves commoditization. If AI tools make it easier to replicate software functionality, the moats that justified premium valuations may erode. Buyers are asking whether a CRM system built over years could be approximated by AI agents, or whether an analytics platform's models could face competition from general-purpose AI.
Validity aside, buyers are pricing in the risk, compressing multiples and further weakening the IPO that alternative sellers might otherwise use as leverage. Few software companies have disclosed meaningful AI-specific revenue, making it difficult to claim AI as a valuation tailwind when public markets are treating it as a threat.
What this means for deal timing
The practical implications for sellers center on timing and expectations. As 2025 progressed, more executives concluded it no longer made sense to wait, with sellers becoming less anchored to 2021 valuations. The gap narrowed not because markets recovered, but because sellers adjusted.
For those still holding out, outcomes have been mixed. Buyers remain selective but active. Quality assets with clean financials and reasonable pricing expectations still attract multiple bidders, sometimes closing in days. The leverage shift hasn't eliminated competition; it has raised the bar for earning it. The window favors prepared sellers who move with conviction rather than those waiting for conditions that may not return.
Structural protections are increasing
Buyers are also structuring deals to protect against further downside. Earnouts were part of 22% of all M&A deals in 2024. A&O Shearman noted that amid the M&A slowdown, earnouts have become "more popular—or at least more visible" as buyers work to bridge valuation gaps. These mechanisms transfer risk to sellers and reduce the certainty of headline valuations.
For companies with strong fundamentals and realistic expectations, deals still get done at reasonable terms. The bar for "reasonable" has simply moved lower. Sellers who recognize this shift can position accordingly.
Action steps for fund managers and sellers
Benchmark against current comps. Use forward revenue multiples in the 5x to 8x range as the relevant frame, not historical peaks or 18-month-old transactions.
Stress-test the IPO alternative. Assess whether a public listing is a realistic fallback or a negotiating position buyers will see through.
Model the carrying costs of delay. Weigh management distraction, retention risk, and capital constraints against the probability that waiting yields better terms.
Prepare for valuation diligence. Buyers will probe assumptions behind asking prices. Come with market-based justifications, not backward-looking benchmarks.
Shift advisor conversations to timing. Focus less on maximizing headline valuation and more on identifying the right window given current conditions.
Bottom line
Sellers who want favorable terms need to control the narrative before buyers define it for them. That means arriving with realistic valuations, clean financials, and positioning that speaks to what acquirers prioritize today.
In a buyer's market, the quality of materials and messaging matters more than when capital was abundant. A well-articulated thesis and clear metrics presentation can differentiate a company and preserve value that might otherwise erode through extended negotiations.
Collateral Partners works with software companies and their investors to translate complex business value into clear, investor-ready narratives, positioning sellers to engage buyers from clarity rather than defensiveness.
