The SaaS Due Diligence Checklist to Ensure a Successful Deal

Starting the process of selling a SaaS business is a pivotal moment in the entrepreneurial life cycle. As a SaaS Founder, you’ve likely spent years pouring time, energy, and resources into building your product. You know exactly what makes your business great, but now, you have to prove that to potential buyers in due diligence.  

Navigating due diligence can be challenging, and potentially overwhelming for all involved. In the worst-case scenario, overlooking essential details may mean missing out on a lucrative deal. But don’t panic – there are plenty of things you can do before you begin the due diligence process (or even before you begin contemplating a sale) to smooth the road to a successful exit. Drawing from our experience as operators of SaaS businesses with over 40 acquisitions, this article delves into the nuances of due diligence. We share practical insights and invaluable advice to empower SaaS Founders in the process of selling a SaaS business.

So, to give you an idea of what to prepare, we’ll review:

• What happens during the initial review process and how to tackle it
• What the preliminary due diligence process looks like
• What happens after signing an LOI

Knowing this information makes for a smooth selling process.

What the initial review process looks like

Due diligence is for the buyer and the seller. It’s for the buyer to gauge a potential acquisition’s value and also for the seller to gauge the potential buyer’s experience buying SaaS companies and whether or not they’re a good fit for them.

When MeetEdgar Founder Laura Roeder was honing in on a buyer, she did her sell-side due diligence to find the right buyer - which just happened to be SureSwift. She says,

“While others would wait a week between calls, SureSwift was always great about keeping the process moving and scheduling the next point of contact. When I spoke to them, they had already acquired 40 SaaS companies which meant they had the process down cold (which made things a lot easier for me).”

When Roeder was looking to sell MeetEdgar, she Googled MicroPE firms and emailed us something simple:

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We replied with interest, and she sent over topline numbers like customers and ARR (annual recurring revenue). From there, we set up an initial phone call.

When you respond yes to an investment or selling opportunity, or when an investment firm responds yes to your request, you or the firm will set up a discovery meeting, typically 30-60 minutes. Usually, it’s the senior associate and the associate or junior analyst calling to get more information about you, your company’s history, general size, Founder story, and possibly general valuation expectations.

During this meeting, you have time to ask them any questions you want. Take advantage of this opportunity because it’s your chance to gauge their experience and interest in your company’s future.

For many Founders, there are a lot of considerations beyond the valuation to take into account in a sale. For example, you may want to feel comfortable that your existing team will be managed well, or that your customers will continue to receive an excellent product and support. For bootstrappers who spent years of late nights fixing bugs and responding to support tickets, business is personal, and wanting the business you built from the ground up to continue to succeed is a real concern.

The initial review phase presents a valuable opportunity to gauge whether the potential buyer aligns with the ethos of your company. It's not just about the financial transaction; it's about finding a partner who shares the same values and commitment to the ongoing success of the business.

You should ask the potential buyer questions that go in-depth about their experience with acquiring companies like yours, such as:

• What are their buying criteria, and why does this particular business fit their model?
• How familiar are they with your market niche?
• Have they already invested in your niche, and what was the outcome?
• How do they create value?
• How do they partner with their portfolio companies?
• Is your company a standalone purchase or an add-on to another portfolio company?
• What are clear ways the prospective business can become more valuable to the potential acquirer?
• How are operations and current team members affected by an acquisition?
• What is the typical acquisition process, and how long does each stage last?
• How many LOIs does the potential acquirer write each quarter, and how many does it close?
• What type of transition periods for Founders/leadership are typical?
• Where does the potential acquirer receive its capital?
• What are typical acquisition structures?

Last, you should ask if there is a reference list of past sellers (especially businesses related to your industry) available that you can use to gain other perspectives. Sellers are often vocal about their exit experiences, so searching the web for relevant blog articles, podcasts, etc. from key persons involved in the transition can also provide new perspectives.

Anchor your questions around the last two to three years, because a positive experience 6 years ago isn’t necessarily suggestive of their time and attention now.

If all goes well and you pass this initial call, it’s not over. The firm will set up another call with someone more senior or request preliminary SaaS due diligence data.

An analyst with our Acquisitions team says that when SureSwift starts the due diligence process, additional preliminary requests will often be made depending on our first call or two with the Founder. For example, we may request details on product usage, customer segments, and conversion reports.

Be prepared to dig up whatever information the firm requests. It may take time, but it’s the best way for the firm to get the full picture of your company.

The Preliminary SaaS Due Diligence Checklist

After your initial call, the firm will reach out to you if they decide to move forward with the acquisition. So, the next step in the process is to get your documentation together before they send you a preliminary SaaS due diligence request.

This checklist will help guide you through what you need to present to them. It’s important to note that the process varies from firm to firm. Some firms will send you questionnaires, and others will request a few documents at a time. Generally, it looks like the process we outline below.

The checklist focuses primarily on financial history, customer and revenue data, sales and marketing, product, and human resources.

1. Non-disclosure agreement

Before you send anything, you need an NDA to protect your company’s intellectual property (IP). Do not forget this step, as accidentally sending internal information without it can result in catastrophic damage in the hands of the wrong company.

SureSwift always sends out our Mutual NDA at this stage. We have Founders review and sign it before sharing additional information.

If you don’t have an NDA, templates can help you write one. Otherwise, a lawyer can help you draft it.

2. Business overview

Format will vary with each buyer, but you'll likely kick things off with questions about the company like MRR, yearly revenue, a simple breakdown of monthly expenses with currency, profit margin, and more.

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It’s common to provide three years of historical financial data so Investors can understand your revenue mix, cost structure, and current financial position. Be prepared by having all documentation dating back 36 months.

3. Profit and Loss (P&L) Statement

Most buyers will ask for a P&L, typically showing figures for the past 36 months. We prefer spreadsheet format, but other companies might have another preference, so it’s best to ask.

We also ask for details on the seller’s discretionary expenses on the P&L (e.g., owner’s compensation/benefits, rent, travel). Then, we ask for relevant commentary on revenue recognition and non-USD revenue and expenses.

4. Org Chart

An org chart helps investors understand more about your cost structure and how much goes into the people operations side of things. This is where you’ll share the business's organizational chart with a short description of each team member, excluding their name, the headcount, total compensation, tenure, hours worked per week, and function. You’ll include yourself and all other founders/owners who contribute to the business. This only requires an easy search into the payroll system.

5. Analytics Access

Some firms want to view your GA4 information to see how well your website performs. If you’re not using GA4, they’ll want to see whatever website analytics tool you have set up. This lets them see your advertising ROI and track your video, social networking sites, and applications, including your active users, demographics, conversion data, and more.

6. SaaS Revenue Metrics

You’ll share any additional revenue metrics you haven’t already shared, such as ARR, MRR, Churn rates, CLV, renewal rates, revenue retention, MRR, and additional growth rates.

7. Tech Information

Some firms may ask for information about the technology you use, such as the project management software and more.

At SureSwift, we place a considerable emphasis on tech and compliance review before offering an LOI (Letter of Intent). This is because issues with tech and compliance can be a quick deal breaker, and we prefer writing strong, highly dependable LOIs that we do not have to walk away from or renegotiate.

Pushing some of this review earlier in the process can save lots of time and resources. If possible, we sometimes even like to do a quick code review before writing an LOI.

8. Compliance Form

Then, the firm may ask compliance questions about how you handle security and customer data. With privacy concerns growing in recent years, frequent changes making it difficult for small teams to keep up, this can be a daunting part of the process.

If you’re not already performing regular data security audits, now is the time to start. At the bare minimum, you’ll want to conduct a thorough data inventory, identifying and documenting all types of data your SaaS platform collects, processes, or stores. It’s better to have the complete picture before entering the due diligence process than to receive an unpleasant (and potentially costly) surprise in the middle of negotiations.

9. Letter of Intent (LOI)

If the due diligence satisfies the firm, they’ll send you a formal Letter of Intent stating the broad terms of the potential definitive agreement, such as the purchase price and form of consideration.

An LOI is typically, though not always, a non-binding agreement. It’s just meant to solidify any discussions leading up to this point and also provide you, the seller, with a clear outline of what the buyer can offer.

The non-binding LOI sets you up for a deeper due diligence process so once it’s received, the firm will set up a data room for you and will provide further detail and additional requests for sensitive information.

During this time, we also recommend vetting the investment firm. Contact former Founders through email and ask them if they’d be willing to chat about how the buying process went and what to expect from the investment firm before, during, and after acquisition. Remember, this is your company; you want to sell it to the right firm, so you’ll need to do your own due diligence.

10. Deep Due Diligence / Pre-Closing Due Diligence

After the LOI is when the real detailed due diligence typically begins for private equity acquisitions. Very specific requests related to contracts, documentation, the capital structure, product usage, product development, tech stack, HR, customer reports, accounting policies, and more are requested and analyzed.

At SureSwift, we like to get most data for analysis pre-LOI. The period after LOI is the kickoff of our deeper due diligence process to have a smooth transition period.

During this more intense due diligence process, we will conduct an in-depth review of employee and contractor agreements, documentation, prior marketing and growth efforts, and more to understand better how we will manage the business once we take complete ownership.

The period after LOI and before closing for SureSwift is often more about learning than analyzing. One exception to this is our more detailed tech review that takes place immediately after we get under LOI. We want to make sure the tech can support our vision for the product under our ownership.

A Parting Tip

It is worth highlighting data integrity; acquirers need strong reporting/data quality to have confidence in their analysis (to establish strong revenue and earnings quality). For the size of businesses we are dealing with, having all payments flow through Stripe is ideal and properly setting up and reporting SaaS metrics using a tool like ProfitWell or Baremetrics is important.

Conclusion

Whether you’re acquiring a SaaS business or selling yours, you will likely go through a due diligence process at some point.

If you’re an acquirer or looking to sell your SaaS business, our team at SureSwift Capital is here to help guide you through this process and answer any questions you may have. Following the tips outlined in this checklist and having the proper documentation in place can save yourself time and stress during the due diligence review process.