What Should you Expect When Going into Due Diligence (When Selling your SaaS Business)?
Software as a Service (SaaS) is the trending business model and continues redefining how businesses acquire technology. Most enterprises today run their operations on this model with many exclusively operating on a SaaS platform. From Customer Resource Management (CRM), human resources, data management to accounting and invoicing, SaaS services are in high demand.
Revolutionary Business Model
With the advances in internet technology, the SaaS business model has continued thriving with huge investments now a feature in the industry. From Google, Adobe, Slack, Shopify, Salesforce, Zoom, Dropbox to Wix, SaaS companies continue dominating different markets.Cloud-based software has revolutionized the business landscape through this rapid and profitable business model.
Acquisitions in the SaaS industry are also on the rise, and if you plan to sell, there’s no better time to make a move. Many private investment firms now search for undervalued SaaS companies and acquire them cheaply before ultimately finding ways to add value.
With attractive future revenues and buyout potential, these companies make a lot of sense to investors. These are some of the reasons driving SaaS-focused M&A transactions to an all-time high over the last few years.
Due Diligence when Selling a SaaS Company
Selling your SaaS business is more demanding than for a traditional business. There’s more scrutiny for SaaS companies and you should prepare for intense pre-acquisition diligence. In the case of your SaaS business, however, expect more demanding questions from the buyer.
Completing due diligence enables you to maximize the value of your SaaS Company. For this reason, you should have an idea of what this process demands. Here are some of the things you should expect from due diligence when selling your SaaS company.
1. SaaS Revenue Diligence
Revenue is a major driver of SaaS business valuation. It is a key focus for buyers, and your SaaS broker will highlight this early enough. Revenue diligence is extensive and one of the most arduous tasks you will carry out in the exit.
There’s a lot of focus on revenue streams, Net Monthly Recurring Revenue (MRR) growth rate, net and gross Monthly Recurring Revenue (MRR) churn rate, Average Revenue per Account or ARPA. Your business also faces scrutiny on revenue data and reporting. You must have clearly organized revenue data for easy assessment for the venture.
Working with a business transfer agent or broker helps a lot to streamline revenue data and reporting. These professionals help you to have everything in order from revenue recognition, revenue classes, customer discounts, free months, and booking procedures. Revenue diligence goes further than a business valuation for your SaaS business.
2. Intellectual Property Diligence
SaaS businesses are technology-based and this brings up the issue of Intellectual Property (IP). You have to guarantee watertight intellectual property. The buyer wouldn’t want protracted legal battles over IP issues. This is why you need to secure the IP before putting up the website for sale. Your SaaS website broker will guide you through this process when crafting your exit strategy.
3. Churn Diligence
For a subscription-based business, churn is an inevitable factor when it comes to due diligence. This is critical assessment to determine the viability of the business, its risks and actual financial health. Customer churn is a topic that will come up extensively at this point and you need enough data to demonstrate a clear picture.
You must explain the loss of customer subscriptions because this is an essential asset. Your customer churn rate should come along with strategies to bring back these customers or win more to diversify your customer base. Buyers want to see clear tracking of churn over different periods and you should have this data and a clear strategy formed out of the information.
4. Customer Support Diligence
SaaS businesses will either succeed or fail based on the quality of customer support. When selling your company, expect a lot of focus on the state of customer support. The customer support function is an integral part of the SaaS due diligence process and your broker prepares the business for it.
Due diligence involves reviewing help desk or ticketing systems, resolution rate and customer satisfaction, and average response time. Buyers want to see simple and well-optimized customer support function. They don’t want a complicated customer support process that requires a lot of time and training.
5. Source Code Review
Your SaaS Company requires good documentation of their source code. When you have well-documented, annotated and tested source code, it assures the buyer of the opportunities for growth. Most investors want to scale into higher figures and a source code makes the venture more attractive.
Due diligence will involve scrutinizing the source code documentation for readability, transparency, stability and trustworthiness. The buyer will want a straightforward code that they can use to grow the business after your exit.
6. Customer Acquisition Cost (CAC) and
Another area that receives attention is Customer Acquisition Cost (CAC). It is the total cost of all sales and marketing expenses over a given duration to acquire a customer. CAC matters for the SaaS business buyer because it helps determine the cost of replacing customer churn.
7. Customer Lifetime Value (CLTV)
Customer Lifetime Value (CLTV) is the average amount of money earned from a single customer during the time over which they pay for a service. This metric provides a better picture of the health of your SaaS Company than any other parameter in the due diligence. For this reason, the buyer will focus a lot on the CLTV to get a comprehensive view of the business.
Preparing for Due Diligence
Due diligence for your SaaS demands a lot from you and this is where our team comes in handy. When you contact us to work on an exit plan, we do more than use a website value calculator and give you an asking price.
We look at key value drivers and design ways to work on these to make your SaaS Company more attractive to the buyer. We also carry out intense preparation for the due diligence to ensure you have all details that might be required. Contact us today and let’s help draw a custom exit plan for your SaaS Company.
Let’s hop on a quick call to discuss the timing and prospects of an exit based on your goals and the current state of your business. Schedule your free exit consultation today.
You're guaranteed to come away from the call with:
Clarity about your business
Knowledge of the landscape
A high-level exit plan
A rough valuation
Specific next steps
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Hello Exit was awesome to work with on the deal. They provided great support and advice all through – from initial interest discussions, negotiations, contract closure to execution. They’re very prompt and proactive which sails the deal making through. They also provided great support and mediation help post transition on some key contract payout clauses, which is highly appreciated. I recommend Hello Exit highly to SaaS business owners and entrepreneurs.
I’ve known Dustin (Hello Exit’s Founder) for over 10 years, and actually acquired a SaaS company he founded. I’ve always found Dustin to be extremely sharp, fair and honest, reasonable to deal with, and the kind of person you would want to do business with again in the future (which is rare these days). I’m currently mentoring and incubating over 150 international startup companies, and have already talked with Dustin about bringing Hello Exit into these businesses to broker the exit once they are profitable and solidly into their momentum phase.
Hello Exit is one of the best and most trustworthy SaaS advisories and brokerages in the industry! If you run a SaaS business, and Hello Exit contacts you, you should definitely talk to them! Even if you decide not to sell, it will be a very worthwhile and fruitful conversation.