SaaS Business Transaction: Need Your Expert Advice!

Euclides Major is an experienced SF investor in Saas. You might want to reach out to him.

I've invested and exited >6 SaaS companies and have been in SaaS for 15yrs (built software 0 to 1, implemented software across large enterprises, etc...)

Echoing all the above.

Unit Economics: At first glance, seem great. Note that LTV/CAC should be a minimum of 3:1 (this is just an industry benchmark) but you need to account for churn. I'd recommend doing a cohort analysis (let me know if you want more details on how to do it--it's not hard but if you haven't done it before it takes a few minutes to grasp) but that will either help you bring down the valuation or validate the growth and opportunity. This uncovers the true trends of the business. Understand what is coming from referrals or WOM too. This may or may not be reflected well in the unit economics. They could have a great model and great sales channel but if it's paid and there's not organic/WOM this may be problematic in the long run. You just want to understand why. Good software tools end up having some level of WOM.

Customer Acquisition Channels:
Like any biz, you want to understand if there is a single channel risk or what the opportunity is to either expand channels and/or customer profiles. Note that adding features in SaaS isn't like other products /services that might be "easier" to add. So, if you do want to expand customer profiles (and potentially channels), what would that require on a product development standpoint. New sales channels are usually better but depending upon the unit economics they may or may not be accessible. Not a dealbreaker but just understand that.

Customer Concentration: Ensure no customer concentration.

Tech/Product: Not sure your background but you MUST have a technical operator involved going into the deal and during due diligence for a code review. There is ALWAYS technical debt, so you need to understand the scope of that and what will allow you to scale or prevent it. If you'll need to make large capital allocations towards that, it can bring down the valuation to account for that BUT make sure it's feasible. It ALWAYS takes longer than you think. Make sure code is documented and have the technical person assess the tech talent.

Tech Team: If you do the acquisition and there is a small team and people leave, this will be a massive headache for you because you will need to get a new tech team ramped up on the code and there are always bodies buried, meanwhile it could break. So, just ensure that they stay (lots of structures to incentivize this). Also, word to the wise, tech folk are unique so you or a tech operator needs to make sure you develop a good culture with them--if they don't respect you or the technical operator... you are in for a treat!

Compliance/Security: Not sure the type of SaaS but if it's B2B make sure you understand security, compliance etc... those are annoying things but can bite you depending upon your use cases and customer profile. Also, if you want to go into enterprise , those are requirements, so you need to understand what kind of investment would be required to get that in order. This is also important for integrations and any opportunities there.

AI Risk: Also, given AI, make sure you have a strategy to leverage AI going forward, otherwise, you'll be left behind. AI has a real risk of completely disrupting a lot of SaaS tools and the playing field is going to get much more competitive BUT you will be able to access and ramp more talent; just have a really really good plan! Competitive landscape now + the possible future with AI is more threatening than ever. If you don't have AI, your multiple will be substantially less upon exit (I don't have data but just know this to be true), but if you leveraged it uniquely or build in something that is a bit deeper on the LLM stack, it could yield a great return (but that is a TBD and potential). So, with that said, understand the capital needs to make AI happen (good news it won't be as expensive as traditional software but development is expensive and consider you may need to hire additional engineers --or maybe not).

Customer Usage: Usage, usage, usage... this will show up in the churn numbers but understand what customer are doing with the product, how frequently they engage with it, what are the use cases.

You'll unlock some interesting behaviors to understand if there is opportunity or concerning patterns. Companies are usually not great at activation>>onboarding>>ramping customers and customers may not always be ready once they make the purchase (budgeting or other factors that delay usage depending upon the product) . This is a leading indicator of churn. However, there are plenty of companies that forget they just put the company card down and have it recurring but aren't using it--eventually they figure it out. So just make sure nothing weird like this happens. This can easily get hidden in annual billing cycles. Customer usage is crucial to understand the stickiness and importance of the product. You'll also be able to see if there are super/power users. If you're able to do interviews with them + churned customers this is extremely useful. Depending upon the type of product/model, you'd want to see land+expand within a company and increased usage--this isn't always the case, so depends on the type of SaaS.

Freemium/free trials: This tactic is often employed. It can be great for certain products and terrible for others. No real tips here just look at the data and numbers if they have this, and look at conversion against industry benchmarks.

Customer support: understand this. This is the treasure trove of product development but usually it's ugly. You need to understand why bugs haven't been fixed or new features have not been developed. Prioritization is the most important thing in product development but this is an art . There are mission critical things, features for expansion, and features to fix user annoyances. If things are not architected well or the team is mediocre or whatever the situation, the bugs will keep popping up. This can spiral and cause churn, development headaches, suck up your cash, and poor reviews/WOM. So, understand this.

Understand the budgeting, buyer cycle and other decision makers in the process. This is just like any other business. Try to understand the sensitivity of these products getting cut within budget cuts (especially in this economic environment) and how they get purchased. Also, understand what customer activation and customer success looks like--these are opportunities usually.

Implementation: not sure again who the customer is but if it is B2B and/or enterprise, how easy is it to implement and support on the company side? One challenge with custom or enterprise software is that it requires implementation services. If you don't have a large network of people to support implementation, onboarding, training, and support the software project will get stalled... the customer's time to value will get stalled... you revenue recognition will be delayed. This also becomes a churn risk. If it requires people on the customer's side to implement the software, you need to understand the requirements for the customer too. For instance, if they have a salesforce integration but 1 SFDC admin and 20 projects in the backlog but marketing didn't communicate/coordinate their software purchase with another department, things can go awry. Also, for software maintenance (eg software changes or managing the tool) do they need to hire a new person or is it a FT job of someone once the tool is implemented? This is usually just for enterprise software but I've seen too many tools to be purchased that then lacked the support or the customer didn't realize the total cost of ownership. So just be aware of this.

Bookings vs. Billings (Cash) vs. Revenue are not the same thing, so understand what those look like and discrepancies--accounting tricks are always a blast to unwind! If they do monthly billing, you'll have cash flow + growth problems, and if you adjust their offer from monthly to annual, you'll see some churn. There are 3rd party financing tools that can help you manage your cash flow but these are good things to understand. Not a deal breaker but can help negotiate or know what you're getting into.

Exit: What is your true differentiator in the product? Understand if this is something that is defensible. If you get purchased just for distribution this will look different than for both product + distribution (ideal) vs. just product (vs worst case just team). So, just consider those factors or have a plan forward to ensure you have something interesting from a UX standpoint or data or something else...

Other note:
I've seen some really great affiliate programs and communities being developed to ultimately create an ecosystem--this is the holy grail. Ecosystem building will increase your exit multiple. So, consider this as you think through the future potential (assuming this doesn't already exist).

I'm sure I missed a few things...

Happy to chat further on this! --@----.com