On the surface, that SaaS company you’re looking to acquire might seem like a great addition to your business. But before making an offer, you’ve got to do your homework to ensure that it really is a good investment. Conducting a thorough due diligence process will not only save you time by quickly disqualifying prospective acquisition targets, it will also help ensure that you pick the right company to help you meet your goals and deliver value.
Below are some important considerations to keep in mind before your next acquisition.
Look at the numbers
There are several key numbers you’ll want to look at when you’re considering buying a SaaS business, the first of which is churn. Look at what segment of the market they serve and identify the average customer churn rate (a quick Google search should put you on the right track). If the company’s churn rate is way off the mark, then it’s not a good investment. High monthly churn rates, like 20 percent or more, could be an indication that the company’s product or service isn’t keeping customers happy.
Customer lifetime value is another important consideration because it’s baked-in expansion revenue. Finding out the lifetime value of a company’s customers will give you a good indication of how healthy the business actually is. If the company’s product is a good one, there should be plenty of opportunities for add-ons and upsells to increase revenue over time. Even if you have customer churn, you might have expansion revenue that outpaces it, so this figure can be key.
Finally, find out what their customer acquisition costs are. Look at how they attract new customers and how much they spend on marketing, content, paid acquisitions and partner affiliate deals. If the overall cost is high and they’ve got a lot of churn, you may want to think twice about investing.
Check out the source code
This is crucial when you’re acquiring a tech company because the last thing you want to do is buy something that has outdated, poorly written, or unworkable code. When company founders aren’t from a tech background, it may be that the code has been outsourced and written by a developer who’s copied and pasted different scripts, rather than done bespoke work in-house.
Have your team check that the source code is readable, well-written, has proper documentation, and is built using a modern framework. Always check what’s under the hood, because otherwise any unworkable code will come back to bite you in the end.
Do an IP review
Issues over IP ownership can cause a mountain of problems if everything isn’t in order. If the company has used a third-party developer to build out any of the code, it’s crucial to make sure there’s an IP assignment. If that’s the case, you’ll need to make sure there’s an agreement in the vendor contract. If not, they’ll need to get an assignment from the people who built it.
Sometimes third-party developers build features and use a reusable framework which they own, rather than the company they’ve created it for, which can lead to legal challenges. You only have to look at Facebook’s financial settlement to see how dangerous it can be not to have IP assignments in place.
Examine customer support
Customer support is at the heart of any SaaS business, and a business will grow and thrive based on how well they treat their existing customers. It’s worth delving into your prospective acquisition’s customer support process and looking at the time to first response, the number of tickets submitted every week, and resolution times.
You want to see from support conversations that the team reacted quickly, communicated well, and solved customers’ issues robustly and to their satisfaction. You also want to see that problems get solved, not diverted or fudged. If the business isn’t prioritizing retaining its valuable customers, you might risk investing in one that doesn’t have long-term potential.
Research now to save time and money later
There’s a lot to consider when you’re buying a SaaS business, so taking the time to evaluate the company from different angles will help give you a better insight into what to expect and how it should perform in the future. Doing a little digging — that goes beyond just figures, valuations, and projections — can save you a lot of time and money in the long run.