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SaaS due diligence: 10 things buyers check
In short
Due diligence is the buyer's check that everything you shared before the LOI is accurate, with no hidden surprises. For a SaaS business, expect detailed questions on ten areas, from your financials and churn to open-source licences and customer contracts. Have the data ready before you sign the LOI: unprepared sellers lose months, and sometimes the deal.
You've attracted a buyer and signed an LOI? Congratulations, that's an exciting milestone. But it's not quite the finish line: you're now entering due diligence.
Due diligence is often the part of the process sellers dread most, and we'll admit it's not the most exciting part of M&A. But there's a lot you can do to prepare for it and avoid unnecessary hurdles.
Due diligence, explained
Due diligence (or "DD") is the buyer's way of confirming that the information shared before the LOI is correct, and that there are no hidden surprises before going ahead with the transaction. It involves a thorough review of financial records, legal documents, operational processes, and more.
Its scope varies with the business and the type of transaction. A share deal generally requires a more extensive review than an asset deal (see Asset sale or share sale?). It also depends on how detailed your discussions were before the LOI. Spoiler alert: the more detailed, the better, if you want to avoid bad surprises and renegotiations during due diligence.
What to expect
At the start of due diligence, most buyers send a detailed data request listing everything they need to move forward. For sellers who are unprepared, or unsure where to find the data, this can be overwhelming and lead to a frantic search for documents. Most buyers will ask you to share documents through a virtual data room: an online folder where they and their advisers can review everything, with access you control.
| Ref | Request | Due |
|---|---|---|
| 1.1 | Financial statements, last 3 years (accrual basis) | Week 1 |
| 2.1 | Monthly churn, last 24 months | Week 1 |
| 2.2 | NRR, GRR and logo retention, by year | Week 1 |
| 3.4 | Top 10 customers by revenue, with contracts | Week 2 |
| 5.1 | Product roadmap, next 12 months | Week 2 |
| 7.1 | Organisation chart and key employment contracts | Week 2 |
| 8.1 | Open-source licences used in the code base | Week 3 |
| 10.1 | Pending or threatened litigation | Week 3 |
| And many more… |
Disorganised or incomplete answers lead to back-and-forth that takes a lot of time, especially for founders who are also running their company, and causes frustrating delays. In the worst cases, if you can't produce the documents requested, or the buyer finds discrepancies in what you've provided, the deal can fall apart.
Due diligence, two waysTime is the biggest deal killer
PreparedDue diligence confirms
- ✓Financials match what was shared
- ✓Contracts in place
- ✓Metrics checked
LOI signed
Closes on the terms agreed
UnpreparedDue diligence reopens
- ↻Documents requested again
- !New information surfaces
- ↓Terms adjusted
LOI signed
Takes longer, and may not close
The good news is that it doesn't have to be that way. A good M&A advisor will help you prepare for this phase and do a lot of the heavy lifting. In most cases, they'll anticipate the most important requests, so you're not caught off guard.
Below are the ten main things you should expect to be asked about when selling a SaaS business. In a professionally run process, many of them will have been at least partly covered before the LOI. But most, if not all, will be reviewed in more detail during formal due diligence.
1. Corporate documents and financials
Buyers will want to make sure your corporate house is in order: your articles of incorporation, bylaws and certificates of good standing, or their equivalents where you're incorporated. They'll also want your financial statements. How extensive these need to be depends on the size of the deal and your sector, but at the very least, have an up-to-date income statement, balance sheet and cash flow statement ready before you start talking to buyers.
Tip
Most founders have some kind of internal financial reporting. For M&A, it's important to have accrual-based financial statements if you want to avoid bad surprises in the negotiations. Not sure what accrual means, or why it matters? Read Why accrual accounting is key for an exit.
2. Customer retention, churn and revenue retention
Buyers will look closely at your churn and revenue retention. High retention signals satisfied customers and a reliable, sustainable revenue stream. High churn can point to issues with your product or service.
Prepare detailed records of monthly and annual churn, along with your net and gross revenue retention (NRR and GRR) and logo retention, to give a clear picture of customer behaviour and product engagement. Be ready to discuss what you've done to reduce churn and keep customers, and what you're still working on. This transparency reassures buyers that your customer base is sustainable.
Not sure where to start, or what to optimise for? We're always happy to share advice on improving these metrics ahead of a sale.
We know tracking all of this can be challenging. But we've seen many processes delayed by months because the data wasn't ready, sometimes missing out on great opportunities. Tools like Baremetrics can streamline data collection, organise historical data and automate reporting. Setting one up early helps you prepare for an exit, and gives you insights you can use while running the business.
3. Revenue streams and growth projections
Buyers want to understand what your revenue is made of, and how much the business can grow. You should be able to clearly separate recurring from one-off revenue, and show how much comes from each product line or service.
Prepare detailed revenue breakdowns, and growth projections based on historical data and market trends. Several scenarios (best case, worst case, most likely) give a fuller picture of your business's potential. Knowing what to present in forward-looking projections, and how, is more art than science, and it's an area where an experienced M&A advisor adds a lot of value.
4. Customer acquisition cost and lifetime value
Buyers will scrutinise your customer acquisition cost (CAC) and customer lifetime value (LTV) to understand how efficient and profitable your sales and marketing are. Be ready to discuss how these metrics have changed over time, and what you've done to improve them. Insight into your sales funnel, marketing campaigns and conversion rates further shows how well your acquisition works.
5. Product roadmap and development pipeline
Buyers will want to see your product roadmap to assess the future potential of what you offer. Present a well-defined roadmap of planned features, improvements and launches, with timelines, resources and milestones.
Be ready to explain how customer feedback and market research shaped the roadmap, and how you prioritise. It shows buyers the company has a strategic vision, and is well placed to adapt as the market changes.
6. Operational scalability and efficiency
How scalable and efficient your operations are matters to buyers, because it drives your ability to grow and stay profitable. Document your processes, systems and workflows to show how mature your operations are. Buyers will want to understand how you handle key functions like customer support, onboarding, billing and infrastructure.
Highlight any automation or process improvements that made you more efficient or cut costs, and be ready to discuss how you'd scale operations to support future growth, including investments in technology or people. This level of detail gives buyers confidence that the business can keep growing.
Expect buyers to ask for your support ticket history too. All software has bugs, and buyers know it, but tickets show whether the product works as it should. They also lead into a discussion about the support you'll give the buyer after closing: be ready to stay available, at least to answer questions, for several months.
Security and data protection are part of this too. Expect questions on how customer data is stored and protected, who has access to it, any past security incidents, and how you comply with data protection rules where your customers are, such as GDPR in Europe or CCPA in California.
Watch out
Revenue growth tends to be founders' main focus, but a clear view of your cost structure is just as important when preparing for an exit. Overlooking costs, or reviewing them too late, can leave significant value on the table.
7. Team and key people
Buyers aren't only buying your product and your customers: they're buying the team that runs them. Expect questions on who does what, how dependent the business is on you or a few key people, and who would stay after the sale.
If you're the one holding the key customer relationships, the product vision or the technical knowledge, buyers will see that as a risk. They may ask you to stay on for a transition period, or tie part of the price to your involvement. The more the business can run without you, the stronger your position.
They'll also review employment and contractor agreements. One point often missed: make sure everyone who has written code or created material for the company, including freelancers, has signed over their intellectual property to it. If they haven't, the company may not fully own its own product, and buyers will want that fixed before closing.
8. Open-source licences in your code
Every buyer will insist that you list all the open-source licences in your code base. Most common open-source licences allow the code to be included in software that is sold commercially. But a few are "copyleft" licences, which require any software that includes the code to be distributed under the same open terms.
Permissive
MIT, Apache 2.0, BSD
Can be used in software you sell commercially.
Copyleft
GPL, AGPL
Can require your own code to be released under the same open terms.
Most buyers will insist that you guarantee there's no code in your code base that could affect their ability to sell the software. That guarantee makes you, as the seller, financially responsible, even after closing, if a copyleft licence turns up. So it's very important to have an accurate list of every open-source licence you use.
9. Contracts to assign
Some customers drive an outsized share of revenue. If a single customer brings in 5% or more of your total revenue, a buyer will want to look closely at your contract with them. They may even want to speak to someone at that customer, to make sure they won't leave after the sale.
It's also important that all your subscription agreements include the legal wording that lets you assign or transfer them if the company is sold. Without it, you could face headaches that delay the sale.
10. Ongoing litigation
No one wants to buy into a lawsuit: they're expensive and time-consuming. Buyers will want to know whether your company is involved in any litigation, and whether any is threatened that could start soon after closing. If there are no lawsuits, there's no problem. If there are, you'll need to tell the buyer, and don't be surprised if they lose interest or ask for a lower price.
Start early
With some knowledge and preparation, you'll get through due diligence and close a successful sale of your SaaS business. And the earlier you start preparing, the better. For what can go wrong along the way, read Why M&A deals fail, and how to make sure yours doesn't.
Questions founders ask
What is due diligence when selling a company?
It's the buyer's detailed check, after the LOI, that everything you shared is accurate: financials, legal documents, operations, customers and contracts. It's where hidden issues come out, so the better prepared you are, the smoother it goes.
Does an asset sale need less due diligence than a share sale?
Generally, yes. In a share sale the buyer takes over the whole company, including its history and liabilities, so the review is more extensive than when buying specific assets.
Thinking about an exit?
Let's talk about your business.
Ready to sell or still years away, the earlier we talk, the better.
Last updated October 2024 · Written by Aïda Aït-Ahmed, Co-Founder, NextoriaWritten in collaboration with Barlow & Williams, M&A law firm for the Digital Age.