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SaaS Strategy

SaaS Due Diligence Checklist For Finance Teams & Founders

Published on June 13, 2024
Joe Garafalo

Founder and COO

Two areas demand a huge amount of attention in the typical SaaS startup journey: fundraising and eventual exit. For SaaS companies rapidly scaling with the jet fuel of recurring revenue, there’s always an investor interested in securing a piece of the pie.

But before they offer you funding or acquire you outright, investors will have to do their due diligence.

Due diligence means digging into the company from top to bottom. Is its business model sustainable and scalable? Has it found a good product-market fit and a reliable customer base with high LTV?

How does it benchmark against other similar companies?

As the saying goes, “time kills all deals,” and the faster you can present the data needed to enable proper due diligence, the better the deal’s chance of being completed.

Providing all this information — and much more — falls to finance. When finance can quickly and easily dig into the data, the due diligence process avoids bumps in the road, helping founders successfully and swiftly raise or exit.

Table of Contents

An Overview of the SaaS Acquisition Process

The SaaS acquisition process is a bit like dating. You may be searching for someone or get a call from a private equity firm out of the blue. However your story unfolds, it all starts with an initial call.

This initial call will be an informal assessment of your company. Here, you’ll lay out your founders and founder backgrounds. What was the vision that started the company? What problem did it aim to solve? Has it made a dent in that market?

At the same time, this process shouldn’t be one-sided. Ask the investor about their own history. Do they understand your particular niche? You still want to deliver your company into the right hands, or partner with the right investor — one who understands the ups and downs of your specific business type.

After the phone call, you’ll move to preliminary due diligence. This is where things get a little more intense, and you provide a general (but still detailed) overview of your company, including financial history, top customers, and product roadmap.

If you decide to move ahead after preliminary due diligence, things will get more serious, and the investors will demand a deeper look into the business.

This is a much more in-depth evaluation of your company: everything performed in preliminary due diligence is dialed up to 11. The due diligence phase is the last before acquisition or funding, so if you make it through, you’ll have a deal on your hands.

But everything depends on the preparation stage. SaaS companies must do their homework, diving into and explaining every nook and cranny of their business.

Data: The Bedrock of SaaS Due Diligence

SaaS due diligence requires in-depth business data. You can’t just show numbers; you need to back them up with documentation and solid financial models. Say you report your customer churn rate to an investor at a solid 2%. That’s what it was last year, after all, and revenue has mostly stayed the same since then.

However, once you dig into the data, you discover it’s actually 6%. You then have to explain your mistake to the interested party. While events like these are all too common in due diligence, they erode trust, unnecessarily drag out the process, and raise serious concerns about the company’s management. After all, if you were wrong about something like this, what else might be lurking beneath the surface?

We’ll say it again — time kills all deals. Whether you’re looking for investment to get acquired, momentum is the name of the game. That means being able to easily access relevant data at the click of a button.

You’ll make a much better impression if you take less time to respond to an investor question, and the data you show is flawless.

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How To Prepare for Preliminary Due Diligence

Before you begin the due diligence process, determine the specific documents you’ll need for due diligence based on whether you’re fundraising or selling.

If you’re fundraising, you’ll want investor rights agreements (IRAs), preferred stock purchase agreements (SPAs), and voting agreements from previous rounds.

For fundraising or selling, you’ll need your certificate of incorporation showing authorized shares. Include legal documents like customer and vendor contracts, employment records, and compliance documentation (GDPR, CCPA, etc.).

Next, build organizational charts for each department and your company at large. Organizational charts show the relationship of different roles within your organization. However, you’ll need to contextualize your organizational charts with an employee census showing salaries, hire dates, and responsibilities per employee.

Finally, one of the most important things you can do to prepare for due diligence is to clean up your CRM. This helps you clearly show customer and revenue data across segments — the granular detail investors want to see before they agree to work with you.

Key Components of a SaaS Due Diligence Checklist

Preliminary due diligence provides a top-to-bottom view of your company, which means starting with the basics. Here’s a starting point for building a SaaS due diligence checklist tailored to your company.

Next, we’ll get into more specific details, but the process should start with a simple checklist of the data and information you want to include.

  • Balance sheet, cash flow statement, and profit & loss statements. It should be no surprise that potential investors will want to see your financials. Best practice means covering at least the past three years across all financial statements and forecasting your profit & loss.
  • Revenue streams by type (subscription-base fees, add-ons, renewal, etc.).
  • Summary of important SaaS metrics like CLV, CAC, churn rate, and other customer retention and sales performance metrics.
  • Product roadmap with specific milestones. What features do you plan on developing, and what specific customer needs are they meeting? What’s your current hosting situation?
  • Outline of your SaaS pricing strategy. Why does that specific model work best for your company?
  • Pitch deck. Tell the story of your business, the problems you solve, and your total addressable market. Who are your primary competitors?
  • TAM/SAM. Help investors understand your total addressable market how large the opportunity is, and how penetrated your business is or isn’t.
  • Top 10 customer and vendor contracts. As the second largest expense in SaaS after headcount, vendor contracts are an especially important part of your burn profile.
  • A detailed cap table can be relevant even for an acquisition, as it shows investor confidence in your company.

Building Your Due Own Diligence Checklist

To bring investors on board you’ll need to provide granular views of revenue, expenses, sales, customer and retention data, and headcount costs. Then, you’ll want to consolidate it all in a financial model.

Revenue

SaaS due diligence wouldn’t be due diligence without showing your ARR and MRR by customer. You can go one better by splitting ARR/MRR by customer cohorts (vintages), product lines, size, and more relevant attributes. This will help investors understand how groups of customers have shifted over time, providing insight into retention and customer lifetime value.

Providing deep insights like these is one reason it’s vital to ensure your CRM is clean before selling or fundraising.

Include total contract value to show the full picture of how much revenue you earn per customer beyond ARR/MRR, and make sure your revenue recognition process is solid.

Expenses

You’ll want to show your historic monthly financials on a granular, departmental-based level. Break expenses down by type: marketing, G&A costs, costs of goods sold, etc. You’ll especially want a clear view of vendor spend, and how that will scale across departments over time.

Lining out expenses gives investors a view of your cash burn rate and helps them understand how your business can scale, and how capital efficient you are.

Sales Info

Investors will want to understand where sales are coming from and at what rate sales reps are winning deals.

Show pipeline generation by channel. That means breaking them down by inbound channels like organic search, PPC, partnerships, and outbound channels.

In addition to historical data, you can lay out sales qualified leads and marketing qualified leads to give investors a picture of your current sales pipeline. You should also show your cost per opportunity.

Show how smooth your sales pipeline is by including win rates and average sales cycle in your pitch. Explain how customers go from new leads to opportunities and show your average sales price (the amount a new subscriber pays before renewals or upgrades).

Further, explore your pipeline with a closed-won/closed-lost summary. Explain some of the top reasons deals were closed-lost so investors can understand why customers might pass on your product.

Highlighting your sales team’s performance is crucial. To build more confidence, be ready to show AE quotas and their average attainment to quota.

To illustrate your go-to-market strategy, explain your sales process and what points you emphasize to help stand out from competitors.

Finally, outline your sales rep attrition rate and your sales rep ramp rate.

Customer and Retention Data

Investors want to understand your customer concentration risk, so lay out customer composition. Demonstrate the sustainability of your model by showing historical customer retention metrics.

Show your average customer acquisition cost, LTV/CAC ratio, and customer churn by segment.

Overall, investors want to understand that your SaaS business has reliable, predictable MRR streams from specific customer cohorts that you can retain.

Net and gross dollar retention are especially important here. These metrics show the frequency of upgrades and downgrades among your existing customer base. High retention shows investors you’re getting the most out of your recurring revenue model and that your product is sticky.

By showing net dollar retention by product line and support tier, you can help investors understand the “why” behind these metrics across specific customer cohorts.

Since retention is so important, you can also include customer feedback, such as net promoter score, CSAT, and even product usage metrics.

Headcount Costs by Department

At around 70% of total spend, headcount is the largest expense in SaaS startups. Getting it right can make or break your business.

That’s why it’s critical to show investors you understand your headcount costs. Clearly lay out headcount composition and costs by department. Include the fully loaded costs: salaries, benefits, variable costs, and any equipment and travel costs.

You can get granular by showing headcount metrics like ARR per head, so that investors understand the revenue contribution of each department.

Bring It All Together With a Financial Model

Financial models combine all your business data and show projected performance over time — exactly what investors and acquirers want to see.

As part of the due diligence process, you should build a solid financial model that forecasts 3-5 years in advance. Include top-line growth, expenses including headcount, balance sheet, and your net burn rate. Make sure you line out the assumptions used to build this model. You can also go the extra mile by including scenarios that model specific operational risks.

If ratios change in the outer years, be prepared to explain why and highlight assumptions or proof points to validate the increase or decrease.

When aiming for fundraising, build the funding round into the model, showing how you would use it and how the investor would get a return on their investment.

Don’t use the financial model you use daily — create a new one that is well organized and easy to manipulate specifically for the due diligence process. Investors will more than likely build their own model accounting for their personal views based on the entire story, diligence materials, and their view of the space.

How Mosaic Can Help You Prepare for Due Diligence

The above provides a brief overview of what you need to consider when conducting SaaS due diligence. While the process can seem overwhelming, the core of due diligence is data.

By integrating with your CRM, HRIS, and ERP, Mosaic provides a complete view of your company all in one centralized location. You can build flexible financial models, dig into metrics, and segment by customer cohort — exactly what you need for thorough due diligence.

With Mosaic, everything you need for a complete and thorough diligence process will be available off the shelf, highlighting your mastery over the business.

You won’t be caught off guard and can quickly pull up relevant information, giving investors granular answers to questions in beautiful, easy-to-understand charts. All this without having to scour spreadsheets, perform tedious calculations, or risk making an error in Excel.

SaaS Due Diligence FAQs

What are the key documents used during due diligence?

Your three financial statements (cash flow statement, balance sheet, and profit & loss statement), certificate of incorporation, organizational charts, legal records, and letter of intent are the most important documents used during due diligence.

How can businesses leverage due diligence to negotiate better deals?

What are the potential pitfalls of the due diligence process?

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