A 5-Point Checklist for Evaluating a SaaS Acquisition

When evaluating a SaaS business for a potential acquisition, a buyer should use a structured framework to assess its viability and potential. This five-point checklist covers the critical areas of diligence, focusing on Churn, Code, and Customers.

1. Churn (and Financial Health)

• Core Question: What is the financial health and customer loyalty of the business?
• Analysis: Churn is a primary indicator of a healthy SaaS business.
  • Analyze Churn Rate: A low churn rate relative to industry benchmarks (e.g., for SMB vs. enterprise customers) is a strong positive signal.
  • Review LTV and CAC: Scrutinize the Lifetime Value (LTV) and Customer Acquisition Cost (CAC). A high LTV can justify a higher CAC, but a high CAC with low LTV and high churn is a major red flag. These three metrics must be reviewed together.

2. Code (and Technology)

• Core Question: Is the product solid, scalable, and legally sound?
• Analysis: The quality of the technology is fundamental to a SaaS business.
  • Codebase Quality: A modern, well-organized, and well-designed codebase indicates a strong development team and makes the product easier to maintain and scale.
  • IP Ownership: Verify who owns the intellectual property. Complicated ownership involving multiple contractors or vendors can create legal risks down the line. Ensure all ownership claims are backed by clear contracts.

3. Customers (The Ultimate Litmus Test)

• Core Question: Are the customers happy and well-supported?
• Analysis: Customer sentiment can reveal hidden problems that don't appear on a balance sheet.
  • Read Reviews: Read every review, testimonial, and social media mention to get an unfiltered view of customer satisfaction.
  • Test the Product and Support: Sign up for the product yourself. Contact customer support to see how they handle inquiries and problems.
  • Talk to Customers: Reach out to a handful of current customers to understand their experience directly. A business that puts customers first is a much safer bet.

4. Fit

• Core Question: Does this business align with my skills and strengths?
• Analysis: Identify the target's primary weakness. A good fit exists if the acquirer's core expertise is precisely what the business needs to unlock its next phase of growth.

5. Market

• Core Question: How big is the opportunity?
• Analysis: Assess the total addressable market (TAM), the competitive landscape, and the target's market position. Look for opportunities for expansion or a unique brand story that has not yet been fully exploited.