Evaluating a SaaS company for acquisition can be intimidating if you don’t know what you’re looking for.
Building your own SaaS business is often stressful. If you have the equity and you want to dig straight in, acquiring a SaaS business one is one of the options you have on the table.
In this post I try to break it down to you how you should evaluate your portfolio of software companies you are about to acquire. Finding that portfolio is a totally different story so let’s not dig into that this time. Instead, let’s try to find a winner formula for the time consuming and costly due diligence.
First, you should get your eyes to churn rates. SME and Enterprise level organizations usually have different variations in their churn numbers – bare that in mind when executing a study. Use common sense if you see churn rates that are >20%. 1/5 paying subscriptions gone out of the window is a big loss in any SaaS business.
Second, CLV. Customer lifetime value should give a perspective if this company has opportunities to grow & evolve.
Third, CAT. Cost of Acquiring a Customer tells you nicely what sort of growth engine is needed.
Most of us who have been working with SaaS business has seen some copy and paste s**t solutions. You don’t want to buy a SaaS without checking and having an expert comment the source code. What you want to look from the code is readability, how well is documented, what sort of frameworks is in use, what is the lifecycle of those frameworks and if there are end of life components in use etc. Basically how well it is designed and engineered? Usually, if you are not technical you need a technical maestro on this task (give me a call).
In my experience some SaaS businesses have protected their IP rights far better than others. You need to go through what is the level of your future Intellectual Property rights. This means going through subcontracts and interviewing developers. A highly important task as you don’t want to end up with a lawsuit for breaching or using someone else’s technology in your domain without them agreeing to it.
In my opinion, regardless of the field of your business, you should always look at this as an important function. Key metrics in customer support are usually easier to find e.g. Time to Response or NPS. Personally, I try to find time to go through tickets and try to sense the vibe from how the paying customers and agents are replying. This gives me a better understanding about the quality of the product and if the customers are passionate about the product or not.
I hope you find this post useful in your hunt for acquiring a Saas business. Like any business ownership transactions there is a need for proper due diligence process but to shorten that and save you tons of money I hope you find this useful. Need help? hit me with a msg.