SaaS Preliminary Due Diligence

SaaS Preliminary Due Diligence

In the world of Software as a Service (SaaS) investments and acquisitions, preliminary due diligence can mean the difference between an eventual successful transaction or costly mistakes. While there is both a buyer and a seller in every SaaS investment or acquisition, this article will focus on how sellers and/or founders can best prepare themselves for preliminary due diligence. 

Due diligence activities at any level can be time-consuming and eye-opening. A SaaS founder only has to be through one SaaS investment or acquisition to know that preparing for due diligence should begin well before anyone is interested in its SaaS business or product. 

This article will review what preliminary due diligence typically entails and how best to set up business systems and processes to ensure that preliminary due diligence is a less heavy lift and that the SaaS business is presented in the best possible light. 

Preliminary due diligence is an important first step when a SaaS investment or acquisition is first being considered. The investor wants to assess the SaaS business and product ahead of any transaction, specifically its financial performance, customers, legal considerations, leadership, organizational chart, growth rates, and overall performance. With this information in hand, investors can compare to industry benchmarks to gauge how well the SaaS business is doing in comparison to its peers and industry. 

Essential Components of Preliminary SaaS Due Diligence

For a SaaS business to prepare itself for eventual investor interest and preliminary due diligence, it’s important to know what information will be required so it can work to ensure they have the information readily available. Below are three areas investors will be very interested in during the preliminary due diligence process. 

Financial Performance

Investors will require financial statements such as Income Statements, Balance Sheets, and Cash Flow Statements for the last three fiscal years prepared by an external accounting firm. They will also be interested in standard financial statement ratios such as liquidity and financial leverage ratios. With this information in hand, investors can get an accurate financial picture of where the SaaS business is today, compare it to industry peers, and enter the information into financial models to estimate where it may reasonably be in 12, 24, or 36 months in the future. When the financial analysis is complete, investors will calculate a valuation of the SaaS business product that it will use to determine if they will make an offer to invest or acquire the business or product and at what price and deal terms.

Customer and Revenue Metrics

When performing preliminary due diligence on a SaaS business, investors are going to be very interested in key SaaS-specific metrics, which may include Annual Recurring Revenue (ARR), Monthly Recurring Revenue (MRR), churn rates as well as Customer Lifetime Value (CLV). They will also want to look at renewal rates, revenue retention, and growth metrics and figures. These performance indicators are valuable in evaluating the sustainability of a SaaS business’s revenue streams and identifying any areas of the business that may present risks.

Sales and Marketing Assessment

Exploring a SaaS business’s sales and marketing techniques can give insights into its customer acquisition tactics, how well it maintains them, and identify areas for improvement. Investors will want to examine the effectiveness of its promotional channels, customer acquisition costs (CAC) compared to Customer Lifetime Value (CLV), and market position in order to make accurate predictions about its long-term profitability.

Preparing for the Initial Call

Prior to entering the preliminary due diligence phase, it is important to be prepared for the initial call with any prospective investors. This discussion can help determine expectations and allow both parties to understand at a high level what each party is ultimately looking for and what they are most focused on. 

The following details will assist in preparing for that initial call.

Setting Expectations

To effectively set expectations, both the SaaS and prospective investors should be clear and aligned on the preliminary due diligence’s timeline, deliverables, and scope. The SaaS and investor should also be aligned on the expected level of information requests and agree on the time the SaaS business has to respond.

Asking the Right Questions

During the initial call, the prospective investor will ask questions to help acquire knowledge about a SaaS firm’s operations, finances, and growth potential. Such questions may include inquiring into their background story, understanding their size in terms of customer base, revenue, the team, and whether part or full ownership is up for sale. By having these discussions upfront, the SaaS business will know what exactly the investor will be interested in and can start preparing the information before preliminary due diligence. On the other hand, the investor will get the first pieces of information they can use to start determining the benefits, costs, or strategic implications of investing in or acquiring the SaaS business or product. 

Creating a SaaS Due Diligence Checklist

In preparation for the preliminary due diligence and the initial first call, the SaaS business should prepare a checklist of the information they will need to provide during preliminary due diligence. This prepared information is intended to enable investor(s) to evaluate the SaaS business’s financial performance and data, customer/revenue metrics, sales & marketing strategies, etc. Below are three areas the requested information will fall under.

Financial Data

For a successful preliminary due diligence process, an investor must undertake an in-depth analysis of the financial statements of the SaaS company it is considering investing or acquiring. Necessary items for the checklist should include the Income Statement, Balance Sheet, and Cash Flow statement. To help provide confidence in the information provided, the investor may want to have an accountant help validate the accuracy of the information and flag anything of concern during the preliminary due diligence review. This added assurance will give investors/acquirers greater confidence during their preliminary due diligence analysis.

Customer and Revenue Metrics

When assessing the health of a SaaS company’s recurring revenue, it is important to include the calculation of certain metrics in the preliminary due diligence checklist. These key customer and financial metrics can help prospective investors quickly ascertain how well the SaaS business is doing in certain areas, and they can then compare to peers and the overall industry. The list should contain items such as Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Churn rates, Customer Lifetime Value (CLV) Renewal Rates, Retention Rate for additional growth rate analysis, etc., which provide valuable insights into stability, performance and growth potential.

Through the review of these metrics, the investor will want to uncover any underlying issues regarding revenue concentration or customer churn levels that could cause problems if left unchecked before an investment decision is made. Identifying areas for improvement will also enable investors/acquirers to formulate initial strategies designed to increase the value of the SaaS business and product.

Sales and Marketing Assessment

When looking into a SaaS company’s growth potential, investors will take the time to analyze key factors such as its sales and marketing strategies, team structure, performance metrics, customer acquisition cost, and market positioning. Evaluating these areas will provide investors with valuable insights that could be crucial when making an investment or purchase decision.

Investors will also want to assess how the SaaS business utilizes different marketing channels and their overall sales and marketing approach toward acquiring customers to identify any risks or opportunities. 


Navigating the complexities of the SaaS preliminary due diligence process as either a SaaS business or investor can be difficult and time-consuming. However, the initial phone call can help set expectations for the preliminary due diligence process and help identify the needs and wants of both parties. It’s also wise for the SaaS business to prepare the information investors will be interested in prior to any engagement with prospective investors. Not only will this save time during preliminary due diligence, but it will also help the company identify areas that may not show their business or SaaS product in the best light. 

Frequently Asked Questions


What is preliminary due diligence?

Conducting preliminary due diligence is a process that assesses information to decide whether or not the company is suitable for investment. This investigation also assists in identifying any potential risks associated with the transaction, allowing investors to make informed decisions before committing resources. The purpose of this review is to ensure that the organization matches up with what they are aiming for and can help avoid unfortunate outcomes down the line.

What is the due diligence of a SaaS company?

Carrying out due diligence for a SaaS firm entails performing an in-depth evaluation of its financials to evaluate accuracy, sustainability and potential for expansion. Buyers must be familiar with the size, development, fiscal measurements, and sales metrics associated with this company before making any decisions. For both buyer’s assurance as well as avoidance of deception, it is necessary that vendors present particular legal disclaimers during the transaction process. 


How can I ensure data integrity during the due diligence process?

In order to help guarantee data validity throughout the due diligence process, it is essential to analyze the data thoroughly, which can be done faster and more accurately through software and, or artificial intelligence (AI) in search for any noteworthy discrepancies.

What is the importance of open and transparent communication with stakeholders during the due diligence process?

Transparency in communication between involved parties during the due diligence process is essential for addressing any worries, helping complete a profitable transaction, and making sure all are on the same page.

Here are three more SaaS articles you might find useful:

SaaS Remaining Performaance Obligations
The SaaS Net Promoter Score
Financial Leverage Ratios

Contact us about our financial services for B2B SaaS companies.