What is a data room and why is it crucial for SaaS acquisitions?

A data room is, in its essence, a secure online platform used to share and manage confidential documents during due diligence processes, ensuring controlled access and streamlined deal execution.

In my opinion, there are three main reasons why a Virtual Data Room (VDR) is essential:

First, security and confidentiality. VDRs are usually encrypted with access control storage to protect sensitive financial, legal, and operational documents from unauthorized access or release.

Second, a VDR makes the M&A process more efficient by centralizing all due diligence materials in a structured format, enabling faster document retrieval, streamlined collaboration, and reduced deal friction.

And lastly, access control and tracking. They allow granular permission settings whereby you can track activities, create audit trails, and ensure that only authorized parties see the specific information needed for them.

Do you need a specialized platform for setting up a data room or is Google Drive good enough?

It’s a good start. It all has to do with dealing in good faith. As always, we sign an NDA with any given seller, which states clearly that we will not be sharing information with any third parties.

So you can send files over email or GDrive – it really doesn’t matter in the early stages. It gets a bit more serious when you start sharing really sensitive stuff like customer contracts, etc.

What are the essential folders for your SaaS data room?

For us initially, the two core items we look for are the financials, specifically the profit and loss statement, and secondly, the customer schedule, which captures your monthly movements of MRR by customer.

Once we progress to due diligence, we would normally have several key folders including:

1. Corporate legal documents that usually contain certificates of incorporation and bylaws, any shareholder agreements, the cap table, compliance and regulatory documents, if any.
   
2. Financials and accounting. If you have audited yearly reports, we’d be happy to see those, which include balance sheets on top of the P&L I mentioned.
   
3. Customer revenue data. At its core, those are customer invoices in their rawest form. Using those, we can calculate the revenues ourselves and see what’s what versus what the seller is telling us. In the same folder, it’s also really cool to see customer contracts and subscription agreements, especially for enterprise businesses.
   
4. Product and technology, which typically includes product roadmaps, development plans, tech stack overview, infrastructure documentation, and any policies or compliance documents the company has like GDPR, SOC 2, etc.
   
5. Sales and marketing – marketing campaign performance, customer acquisition costs, acquisition channels, partnerships and affiliate agreements, and stuff like that.
   
6. The last one would be legal and tax, which is typically carried out by third-party providers in our case, so that’s something we usually don’t touch.
   

Those would be the five folders I would say have to be there.

What are the common mistakes SaaS founders make with data rooms?

First of all, founders often don’t have a data room in the first place. The usual founder to whom we speak doesn’t have a data room because that’s usually something used by larger conglomerates that treat their information as super sensitive.

For us, some minor issues include incomplete or outdated documents. By incomplete, I mean you’re showing me the last 12 months of your profit and loss statement but it’s missing a month, for example. By simply not adding it, it essentially extends the due diligence timeframe, which drags things along and makes it more complex.

And outdated documents really aren’t relevant for us. If we ask for the last four years of your balance sheet and you give us your balance sheet for the last 15 years, it doesn’t bear any meaning for us.

Another topic that’s quite common is just having too much unnecessary information that buries the key insights and overwhelms potential buyers. Luckily, we have the experience to pinpoint which is the actually important stuff versus what’s irrelevant.

What are the best practices in setting up data rooms for SaaS M&A?

It’s really being able to react fast and actually have the necessary documentation. If a seller isn’t capable of showing us how they acquire leads or where they’re spending their marketing dollars, it gets tricky for us to dig deeper because there’s simply nothing to dig into.

Just having a relatively moderate selection of documents that explain your organization really helps accelerate the process as a whole.

Do we, at saas.group have any preferences towards the data that is presented and the tools that are used?

For us, number one is core financial statements, among which are the profit and loss and balance sheet. Usually, we go for the last three to four years.

Moving on, revenue and SaaS data. These are raw customer invoices accompanied by any subscription management tools that track your MRR movements on a monthly basis so we can compare them.

Lastly within the revenue and SaaS data would be customer contracts and subscription agreements. We just want to make sure those agreements are real and we can see they are signed, confirming you have actual customers.

At the same time, a budget and forecast from the selling party would be really important for us because then we can understand how they are planning to grow and by doing what exactly. They are justifying their growth rates or profitability rates by giving us assumptions and ideas about the next 12-24 months.

Besides financials, at later stages, we also ask for operational documents or legal documents. These are necessary not only for us but also for the legal and tax advisors. Those include sales pipeline and CRM data, product roadmaps, development roadmaps, tech stack infrastructure descriptions, support and SLA agreements if any, and employee and HR reports.

For legal, it’s the quite usual stuff like company incorporation and bylaws, shareholder agreements, NDAs and confidentiality, any historical litigation proceedings, IP ownership, and patents.

The sum collection of the company’s existence should be basically in a bunch of folders. But usually, these files are quite simplistic in their nature, being one or two pages long, just showing that what you’re saying is actually true based on X, Y, and Z documents.

How long does the data room review process take?

It really depends on the size of the company and the maturity of the company. For smaller companies, literally, five minutes does it. For larger organizations having sophisticated processes and sophisticated documentation, this might take a couple of days. So it really depends on the maturity of the company.

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Understanding the key terms and concepts of SaaS M&A is essential to having a lot more clarity starting the process. Here we break down the most important terms, with examples, so you can focus on making the best decisions for your SaaS business.

1. Valuation: what’s your SaaS worth?

Valuation is determining your company’s worth for the acquirer. For SaaS companies, this is often based on revenue multiples, growth rate, and profitability.

• Example: If your annual recurring revenue (ARR) is $2M and the average valuation revenue multiple in your industry is 5x, your company could be valued at $10M. It also could be valued at $2M. There are a lot of things going into the valuation process from risk assessment to analyzing the customer base,future growth potential and EBITDA margins. We always recommend doing your research about the market situation and average industry multiples, but also possibly involving an advisor who would provide you with a realistic view of the business. 

2. Types of Buyers: who’s acquiring you?

Understanding the type of buyer can help you anticipate their goals and approach. Here are some common buyer types and real-world scenarios to illustrate their intentions:

• Strategic buyers: These are often competitors or companies in your industry seeking synergies to enhance their existing offerings.
  • Example: When Salesforce acquired Slack for $27.7 billion, the goal was to integrate Slack’s collaboration tools with Salesforce’s CRM platform, creating a comprehensive suite for businesses.
    
• Private equity: Financial firms focused on optimizing your business for resale or growth, typically within a set investment horizon.
  • Example: Vista Equity Partners acquired Marketo and later sold it to Adobe, showing how private equity firms build value before exiting at a higher multiple.
    
• Serial acquirers: Companies like saas.group specialize in acquiring SaaS businesses to hold and grow. These buyers often have deep expertise in their domain, e.g. SaaS M&A, and prioritize seamless transitions and long-term growth.
  • Example: saas.group’s acquisition of Rewardful highlighted their approach to identifying untapped potential for future growth and in this case, leveraging the power of social media and proactive partnerships.

3. Letter of Intent (LOI): the starting point

The LOI outlines the initial terms of the deal, including valuation, deal structure, and key conditions. It’s not legally binding but sets the tone for negotiations.

• Tip: Review the LOI carefully and negotiate terms upfront to avoid surprises later. At saas.group we tend to treat the LOI as a handshake agreement and try not to change the terms of it further down the road unless some special cases arise during the due diligence process. And this is exactly why we recommend having most of the details of the deal clear even before signing the LOI. You can get away but it already means time away from business and lawyer fees, so coming to this with an understanding of what’s ahead is pretty important.

4. Due Diligence: the deep dive

This is the process where the acquirer examines your company’s financials, operations, and legal documents. During this phase, SaaS M&A due diligence often scrutinizes specific documents and metrics to assess the health and potential of your SaaS business. For example:

• Financial Records: Detailed P&L statements, balance sheets, and cash flow statements.
• Customer Metrics: Churn rates, customer lifetime value (CLTV), and monthly recurring revenue (MRR) trends.
• Contracts: Review of customer agreements, vendor contracts, and employee agreements to identify any risks or liabilities.
• Codebase and IP: Evaluation of your source code, patents, or intellectual property ownership.

It’s also your opportunity to assess the acquirer’s track record and vision. Due diligence goes both ways, and founders should think about doing theirs way before agreeing to go all-in with an acquirer to ensure a fit and shared values.

Example Questions to Ask the Acquirer:

• What’s your track record with acquisitions?
• How will this acquisition impact my team and customers?
• What specific metrics or milestones do you prioritize post-acquisition?

By preparing these documents and asking the right questions, you can ensure a smoother SaaS due diligence process and build trust with potential SaaS buyers.

5. Deal Structure: how will you get paid?

This refers to how the acquirer will pay you, and each structure has its own set of advantages and disadvantages for SaaS founders:

• Cash: Payment is made upfront in cash, providing immediate liquidity.
  • Advantage: Instant access to funds that can be reinvested or used for personal ventures.
  • Disadvantage: Potential tax implications and no future upside if the company grows post-acquisition. 

• Stock: You receive shares in the acquiring company, tying your payout to their future performance.
  • Advantage: Opportunity to benefit from the acquiring company’s growth.
  • Disadvantage: Risk of share value fluctuations and delayed access to cash.

• Earnout: A portion of the payment depends on achieving specific performance goals post-acquisition.
  • Advantage: Allows founders to demonstrate value and potentially earn more.
  • Disadvantage: Stressful if goals are unrealistic or factors outside your control impact performance.

Example: An acquirer offers $5M upfront and $2M in earnouts if your company hits a $1M ARR milestone in the next year. Understanding these structures helps SaaS founders evaluate the short- and long-term implications of offers in the acquisition process.

7. Holdback: keeping some skin in the game

A portion of the purchase price is held back until specific conditions are met, such as successful customer retention or revenue targets.

• Example: The acquirer withholds 10% of the payment for 12 months to ensure a smooth customer transition.

8. Purchase Agreement: The Final Contract

This legally binding document outlines the final terms of the acquisition, including price, payment terms, and warranties.

• Tip: Work with an experienced M&A lawyer to review the agreement thoroughly. No relative who has been helping you sell your house, no matter how nice, is super helpful here. You want someone who offers wealth of knowledge about the specific deal type and also a great deal of empathy to be on your side and humanize the process.

9. EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a key metric to assess your company’s profitability.

• Example: If your revenue is $1M, and expenses (excluding interest, taxes, depreciation, and amortization) are $600K, your EBITDA is $400K.

10. Liquidation preferences: protecting investors

This determines how proceeds are distributed in the event of a sale. There are dozens of stories of deals where founders, unfortunately, ended up with nothing, or have gotten way less than they ever expected. In case you’ve raised investment for your SaaS company, understanding the investors’ preferences is a good way to avoid surprises. 

• Example: If investors have a 2x liquidation preference, they get twice their investment back before founders see any proceeds.

11. Sales Multiple: a valuation benchmark

This is the ratio of your company’s sale price to its revenue or EBITDA.

• Example: If your company sells for $10M and your revenue is $2M, the sales multiple is 5x. SaaS valuation often hinges on this metric.

Selling your SaaS business is a monumental step. By understanding these key SaaS M&A terms, you’ll be better equipped to navigate the SaaS acquisition process, ask the right questions, and ensure a deal that aligns with your goals. Remember, it’s not just about the money—it’s about finding the right partner to carry your vision forward. 

Check out our M&A course for sellers to learn more about the acquisition process, metrics used to determine company valuation, different types of due diligence, and determining the best fit with a potential buyer. 

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Key areas acquirers focus on

Accuracy and Completeness Acquirers will closely examine your financial statements for accuracy and completeness. They want to see that every number is backed up by solid records and that nothing important is missing. Messing this up could hurt your valuation and even cause buyers to walk away, so get it right to avoid giving a bad impression.

Consistency Buyers look for uniform accounting practices and principles. If your reporting varies significantly, it might raise concerns about financial stability or management practices. Certainly not the deal-breaker but it would make the life of a buyer significantly more difficult going through the reports that look nothing like they’ve seen before. It’s definitely not the smoothest path to streamlined collaboration! The clarity and documentation of your accounting policies and practices should align with industry standards and be consistently applied.

Current Performance Buyers are interested in how your company is performing right now—think revenue growth, profitability, and how you manage expenses. Show off your solid performance trends and strong financial metrics to give buyers a clear picture of your company’s current health and future potential. This is the part where you really have a chance to shine! Highlighting these can make your company more attractive and show a direction where value can be added with more resources and expertise.

Debt Obligations Expect acquirers to closely review your debt, including loans and credit lines. They need to understand how they affect your financial stability and future outlook. Make sure you have clear documentation of all debts and repayment schedules to ease any concerns.

Feasibility of Projections

We all know about the importance of clear, data-driven projections. In this case, buyers are interested in whether your future expectations are grounded in past performance and current market conditions. Seeing realistic, data-driven projections helps build confidence in your company’s future potential.

Pricing Strategy Impact Buyers will check how your pricing strategy impacts your revenue and profitability. Clearly explain how your pricing decisions drive financial performance to showcase the effectiveness of your approach.

Essential finance data sources for SaaS*

To keep track of the right data, focus on a few key sources each month:

Bookings Data This includes all executed contracts for your software and services. Accurate bookings data is vital for calculating sales efficiency metrics and understanding go-to-market effectiveness. Consider using CRM systems like HubSpot, Zendesk, or Pipeline CRM to track this data efficiently.

Financial Data This covers your SaaS P&L (income statement), balance sheet, and cash flow statement. The P&L shows profitability and expense management, the balance sheet gives a snapshot of financial stability, and the cash flow statement tracks money movement. Present these documents with clear breakdowns of revenues, expenses, assets, and liabilities, and make sure to address any common issues like incomplete asset lists or unrealistic projections.

HRIS / Payroll / People Data Since people are often the largest expense, tracking detailed employee and contractor data is crucial. This includes names, titles, departments, locations, employment status and wage rates. Accurate headcount tracking ensures proper expense reporting and helps integrate this data into financial forecasts. You will also need to prepare an extended version of this report for the HR due diligence part, so giving it a little extra time and attention might be a good idea.

Customer / Revenue Data Detailed customer and revenue data are essential for calculating retention metrics and understanding revenue health. This data supports the accurate calculation of key metrics like Monthly Recurring Revenue (MRR), Gross Revenue Retention (GRR), and Net Revenue Retention (NRR), which are vital for assessing growth and customer satisfaction. To track and manage this data effectively, you need comprehensive information including customer names, unique customer IDs, invoice numbers, invoice amounts, subscription start and end dates, and any adjustments or credits.

Several SaaS tools can help streamline this process. Paddle is a popular choice and not only automates data collection but also provides powerful analytics to help you make data-driven decisions and present a clear picture of your business’s revenue dynamics.

*see more in-depth breakdown here

Common Mistakes Founders Should Avoid

Financial reporting might not be rocket science, especially with all the tools and services available but there are still a few common mistakes we keep seeing from founders looking for an exit.

One big one is inaccurate financial reporting. This includes errors in figures or inconsistencies in reconciliation, which can significantly undermine credibility with potential buyers. Discrepancies between reported and actual figures can certainly lead to a loss of trust, potentially derailing negotiations or affecting valuation. This issue often arises from rushed reporting processes or inadequate attention to detail, underscoring the need for thorough reviews and accurate data handling.

Another frequent mistake is ignoring key SaaS metrics like Customer Acquisition Cost (CAC), Lifetime Value (LTV), CAC Payback Period and churn rate. Failing to present clear CAC and LTV figures might make it difficult for buyers to assess the effectiveness of your marketing and customer retention strategies. For the seller, this can easily result in missed opportunities to showcase the business’s true value and health. Inconsistent historical financial data and poor cash flow management can also be problematic. It can prompt questions about financial stability and poor cash flow management can indicate underlying issues with financial health.

Finally, not addressing revenue concentration risk—where a business relies heavily on a few customers or markets—can be a significant red flag. Buyers are wary of such risks, as they can impact long-term stability and profitability.

Conclusion

By understanding what acquirers focus on in financial due diligence, avoiding common pitfalls, and tracking essential finance data sources, you can present a compelling case for your SaaS company. Accurate reporting, consistent data, and clear insights into your financial health and projections are key to a successful exit. Focus on these aspects to ensure a smooth due diligence process and attract the right buyer for your SaaS business.

If our values speak to you and resonate with how you do business, get in touch. Discuss your options with our M&A team: Dirk Sahlmer k (dirk@saas.group) or Pavel Prokofiev, ACA vel (pavel@saas.group). Learn more about how we grow acquired brands on our blog and podcast pages.

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But what does the process of acquisition look like? We talked with Daniel Thulfaut, Head of Product Growth at saas.group to shed some light on the nuances of product due diligence. With years of experience leading product teams and overseeing acquisitions of B2B SaaS businesses, Daniel walks us through the critical factors evaluated during acquisitions, and the strategies ensuring a seamless transition for acquired teams.

1. What is product due diligence?

Product due diligence is our chance to vet a potential acquisition and make sure it fits into our family of brands and that we have the right resources to make it successful. During a DD we need to come up with hypotheses about potential quick wins, strategic pivots, and missing best practices that we can turn to. It also gives us a head start to expand the central team with the necessary resources, so we have all the support needed ready at the time of acquisition.

2. Are there any deal breakers on the product side of due diligence?

Very few, honestly. The level of product and product org maturity will eventually reflect in the acquisition price – which might mean becoming a financial deal breaker. From my perspective, real red flags are when the product itself does not fit into our existing portfolio at all and we don’t have the expertise to contribute. That is why we try to stay clear of B2C applications and hardware products, for example. We can do what we do because we have very specialized knowledge in the B2B SaaS space and can quickly impact these brands.

3. What’s the first thing you start evaluating when it comes to product due diligence?

The very first thing is to go through the product experience myself – especially the onboarding. This sometimes involves posing as a mystery shopper and going through the official sales cycle.

After decades of experience, we can pinpoint the major product issues, and most often even the history and development process behind them, just by using the product with fresh eyes from a user’s perspective. Interestingly, onboarding is also mostly the first thing we push to work with after the acquisition, with the highest potential to fix both conversion rate and churn issues.

4. How does the product team get involved after the acquisition? Do you start by making some drastic changes?

We usually try to avoid pushing changes very aggressively. During a DD we don’t have access to the full team. I believe a DD gives us a hypothesis to improve a business and a product. But we still owe it to the team to hear them out, view it from their perspective, and understand all the nitty gritty details before suggesting specific changes.

That is why we repeat the DD process in more detail and include the brand team in it. While we can often put our finger deadeye into the biggest wound, there is still an ivory tower effect in place, and we don’t want to take away responsibility and ownership from the team. That said, there are certain best practices that we want to see lived by every brand. If those are not present, we bake those changes and a reasonable timeframe into the acquisition contract.

5. 2023 has been about profitability and efficiency. Can we cut costs on the product side? What are the best practices we use?

If we look at a typical acquisition suspect, most of the teams see a lack of critical resources like product design, product analytics, or sometimes even a product manager owning the product experience. We don’t recommend cheaping out on these roles. Luckily, we run a very efficient central organisation that can lend these resources part-time to the brands to achieve a pragmatic, cost-efficient working model.

The two things we mostly recommend are:

First, revamp the pricing model and increase prices. This is the biggest lever SaaS companies have and also the most underutilized.

For a longer-term effect, we propose to find a more focused approach to product development and even sunset some existing features and product parts. Removing already developed features might sound counterintuitive, but this reduces technical debt and UI clutter and frees up development resources to be spent on something more impactful.

6. What are the most important questions you ask during the dd process?

Essentially, we ask the same questions we regularly ask in our quarterly product reviews. What have you recently shipped, and how did you decide if it was a success? What are you planning for the next cycle, and why are those the obvious roadmap items given the strategic analysis and product vision? In a DD, we dig a little deeper and let the brand walk us through the full process, from idea to release, and also explain the pricing model and the “data science” behind to us.

7. Do you evaluate the product team skillset during the dd?

Absolutely we do! But unfortunately, for the most part, it will be an educated guess based on results and performance since we don’t have direct access to the team. If for example, we find a very incoherent user interface with a clear lack of love for micro-interactions and guiding users, we can assume that the product designer on the team is rather junior (or nonexistent) or that the product org is not set up to include product design in the right touch points to allow for a better experience. Besides those giveaways, we also look at CVs and profiles on LinkedIn and ratios of PMs to developers and designers.

8. What would you recommend to the founders for an easier transition after the acquisition, product-wise?

The real magic happens when founders and acquired teams are open to suggestions and really want to use joining saas.group as a way to take their product to the next level. We have central teams with decades of experience in their fields and facilitated communities of practices to learn from each other. We have a genuine interest in seeing our brands flourish and be a part of their journey into the future. Very few startups and companies actually have access to that kind of talent and knowledge pool – embrace it and welcome us as your extended team and workbench!

Product due diligence in SaaS acquisitions identifies growth opportunities, and ensures compatibility and seamless integration for acquired teams at saas.group. By leveraging central resources and expertise, founders and acquired teams can navigate the transition seamlessly while focusing on efficiency and profitability. Ultimately, product due diligence not only assesses potential but also establishes a successful partnership and growth within saas.group‘s ecosystem.

If our values speak to you and resonate with how you do business, get in touch. Discuss your options with our M&A team: Dirk (dirk@saas.group) or Pavel (pavel@saas.group). Learn more about how we grow acquired brands on our blog and podcast pages.

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What is marketing due diligence in the SaaS acquisition process? And why is it crucial?

In a due diligence process, we thoroughly examine all aspects of a business that impact its future success. This helps us identify both risks and opportunities. Marketing is especially important to analyze because it directly affects both costs and revenues.

The impact of marketing on future revenues can and should be quite substantial and therefore it needs to be analyzed carefully. Having said that, the impact on short-term revenue and Monthly Recurring Revenue (MRR) can be limited if the business has already achieved a substantial MRR from existing customer cohorts. This also means a company that grows in MRR quite substantially can quickly turn into revenue stagnation if the New Logo MRR is declining.

Besides the impact on revenues, of course, we also need to understand the expense side, be it salaries for the marketing team, costs for external freelancers and agencies, SaaS tool expenses, conference and trade show fees, and occasionally, significant paid advertising budgets. Marketing costs often have a significant impact on margins and cash flow and need to be analyzed accordingly.

What are the usual questions that are being asked?

We have a comprehensive set of questions that can be extensive. They’re often tailored based on our initial review of the business, its product, pitch deck, and other public information.

However, some common questions include:

1. Who is in charge of marketing and sales within the company? Is it mainly led by the founder in collaboration with selected freelancers or agencies, or is there a dedicated team of marketers in place? How is the connection between the marketing and sales department? To what extent does the company’s growth hinge on the founder’s personal network, character, or brand identity?
   
2. What has been the growth trajectory of the company in the last 4-5 years, particularly with newly acquired customers, and what are the primary drivers of this growth? It’s essential to consider how industry-specific factors like COVID-19 have created unusual spikes or declines in growth. We also look at how other internal and external disruptions have affected New MRR. Such disruptions might include significant platform changes for businesses reliant on specific platforms, rebranding initiatives, the removal of a blog from the company website, or the emergence of a new, well-funded competitor.
   
3. What is the projected marketing strategy moving forward? Where does the company see the most potential for attracting new users and growing its customer base, and what are the obstacles in realizing this potential?
   
4. As mentioned, understanding the cost structure of marketing is also crucial. What factors drive these costs? How much of the marketing expense is recurring? Are there any long-term contracts that lack flexibility? What is the salary range for the existing marketing team?
   
5. Additionally, we closely examine the marketing technology stack. How is the tracking setup configured? Which CRM system is in use, and how is it structured? What Content Management System (CMS) is being used for the website, and how much autonomy does the marketing team have in making site alterations? Are there any tool or service expenses where we could apply immediate discounts due to negotiated group deals?
   
6. From the responses to the above questions, we formulate specific queries for each marketing discipline. Our central marketing team includes specialists in SEO, Content, PPC, and Affiliate Marketing, each equipped with detailed questions to assess the current state, potential opportunities, and risks associated with each channel. For instance, if a business invests heavily in Google, LinkedIn, or Facebook Ads, we delve deeper into these accounts to understand the strategies and financial outcomes, like the time it takes for these cohorts to reach break-even. In SEO, for example, if the company’s blog is a crucial source of traffic and leads, we scrutinize the backlink profile and historical backlink-building practices to determine if current rankings might be at risk from potential Google spam updates affecting existing backlinks. This detailed approach extends to every discipline within marketing.

What are the most important metrics that are being assessed?

We pay close attention to New MRR by month, its growth, and the factors influencing it. This includes examining peculiar patterns, like significant benefits from Black Friday promotions. We also look at customer acquisition cost (CAC), return on ad spend (ROAS), cost per lead or signup (CPL/CPS), conversion rates (CVR), user and customer retention, and various channel-specific KPIs.

What are the red flags for the acquirers that can be discovered in marketing DD?

So far, we haven’t identified major red flags during marketing DD. However, a potential concern could be discovering that a company has achieved top organic search positions, generating significant traffic and leads, but is part of a questionable link network with risky backlinks and spammy content that hasn’t yet been penalized by search engines.

What are the steps of marketing due diligence, and how long does it usually take?

Typically, either I or my Co-CMO Julian participate in a preliminary call before the actual DD, gathering initial insights. We then conduct a focused marketing call to understand the marketing setup and the founders’ perspectives on current challenges and opportunities. The actual DD process then usually takes 1-2 weeks, during which we maintain communication with the founders to access data and clarify questions. The DD concludes with another call to present our findings and write a comprehensive Marketing DD report for our M&A team.

Founders tend to keep the due diligence process quiet, but ultimately, the more aspects are assessed, the more people are involved. Who is involved in the marketing due diligence?

In most cases, we only communicate with the founders. This can be challenging if there’s a Head of Marketing who isn’t informed and cannot be involved in the DD, especially if the founder isn’t deeply engaged in marketing. In some instances, we also need to clarify technical aspects, which may involve the CTO.

Can you share some horror stories / bad practices that affected the deals?

It’s not exactly a horror story, but a significant challenge arises when we don’t have direct access to live tools and have to rely on screenshots for information, such as from Google Analytics or Google Ads. This can become time-consuming and frustrating for both parties, as it requires back-and-forth communication for additional details and clarifications.

How would you recommend founders prepare for marketing due diligence?

Founders don’t necessarily need to prepare in advance for a marketing DD, as we guide them through the process. However, being familiar with the answers to the questions we’ve outlined can be beneficial for assessing the overall health of their marketing operations, even outside of a DD context.

Do you have any hacks that you could share that would help founders and teams go through the process more smoothly?

Honesty and transparency are key. If we discover that information has been withheld during the DD, it can lead to mistrust and potentially jeopardize the entire transaction. For example, if churn rates have been artificially reduced through significant discounts, this should be disclosed upfront.

In the fast-paced world of SaaS acquisitions, it is important to understand every aspect that goes into the M&A process. Marketing due diligence is nuanced and helps uncover interesting considerations that go into evaluating a SaaS business’s marketing activities. At saas.group, we emphasize transparency, setting the right metrics, and collaborative engagement with founders.

If our values speak to you and resonate with how you do business, get in touch. Discuss your options with our M&A team: Dirk (dirk@saas.group) or Pavel (pavel@saas.group). Learn more about how we grow acquired brands on our blog and podcast pages.

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From tools and processes to maintaining brand independence and prioritizing team well-being, Lewis gives a glimpse into saas.group‘s commitment to founder-friendly, seamless integrations. 

• What is a Post-Merger integration?

Post-Merger integration or PMI is used to describe the time after a company is bought when the two companies become one. At saas.group we should really call it post-acquisition integration (we haven’t done any mergers) but PAI just doesn’t have the same ring to it!

• What are the post-acquisition integration tools?

We don’t need much – Google Workspace to create presentations, notes, and spreadsheets and Asana to track tasks. There are other task tracking tools that are available but we try to keep it simple and unified. Some teams use more purpose-built tools that encapsulate risk management, synergy tracking etc. but we’re getting on fine with Asana for now.

• How fundamentally different is the PMI process at saas.group?

The saas.group USP is that we’re founder-friendly, and this continues post-sale. Essentially we take value preservation very seriously meaning

• No big scary rebrand – we always keep the name and the identity of the company intact. 
• No stripping apart the organization into a functional model – every brand remains standalone with its unique processes. Although lately we’re working more towards introducing more unified tools for the teams, we’re also mindful of the processes they have established over the years.
• Generally, no forcing square pegs into round holes! – if we buy a company, we trust that the founders and the team know the way they operate best. They’ve come this far to be successful and ultimately attractive for us to welcome into the family. So, why change fundamental things? We act as advisors but never push a specific agenda onto our brands.

We see ourselves as custodians and exist to support the brand team rather than dictate its future.

It doesn’t mean that there are no changes that need to be made. We try to use all our operational experience to give the best advice to the teams on what could be optimized for future success. What we don’t do is essentially force them to make those changes but rather have an open conversation and try to show why we think it would be the best-case scenario. 

• How does keeping the brands independent affect the PMI process?

In a traditional PMI, pretty much the whole company is altered which is a massive upheaval, and disruptive for a long time till a positive outcome is reached (if ever). By keeping the brands independent, there’s a lot more focus on what actually matters – delivering service to customers. We respect the brands and share our perspectives and opinions to help them make better decisions.

An acquisition can be a stressful process no matter how transparent or streamlined it is. So our goal is to make the “integration” part as smooth as possible while still keeping a sharp focus on delivering the best product to the customers and helping brands take it to the next level. 

• How does day one of PMI look? When is it?

As a result of our differentiated approach, day one is usually not such a big deal. In a typical deal for us the founder would announce the transaction to the team in the morning, and by lunchtime we’ll be on a Google Meet together, running through some high-level details on the news and introducing ourselves more informally. It’s all fairly measured and relaxed with hopefully a pinch of excitement also.

We also have programs that anyone in the group can join to meet the new team, tell them about their role in the company, and “break the ice”, per se. We find it really beneficial since we’re a remote-first company and bringing people together helps a lot with embracing the culture we’re trying to build. 

• Can you share a checklist that you usually go through during the process? 

Sure, just leave a comment saying “I LOVE CHECKLISTS” and I’ll DM it over!

• What is usually the most challenging part of PMI? Can you share a story?

No matter how much you try to simplify things, PMI is complicated and there’s a lot to do. A problem I see a lot with our brand teams is they can start to become overwhelmed by the variety and depth of actions that occur during a PMI. Recently, a leader came to me with this feedback and we altered our approach slightly to clearly identify the high-priority tasks vs items that can be delegated or delayed (as much as we might try to avoid delay!).

• What is your biggest hack for successful integration?

A commonly overlooked part of integration is also the first step you should take – assure your team that they still have a job and that they are valued post-acquisition. If you skip this step you’ll find presentations on strategy and PMI plans will be of little value. In terms of how to do this, we find the more ways the better – group presentations, 1-to-1s, emails, chat, whatever the team needs to feel secure so that they can focus on their day jobs and the additional tasks which inevitably will arrive.

saas.group‘s approach to Post-Merger Integration stands out for its commitment to founder-friendliness and brand autonomy. By preserving the unique identity of each acquired company, and acting as custodians rather than imposing directives, we aim to support brands in their natural trajectory while offering valuable advice for optimization. By minimizing disruption for both founders and their teams, we try to ensure the most positive experience for all.

If our values speak to you and resonate with how you do business, get in touch. Discuss your options with our M&A team: Dirk (dirk@saas.group) or Pavel (pavel@saas.group). Learn more about how we grow acquired brands on our blog and podcast pages.

The post Lewis Singleton: saas.group’s strategy for seamless Post-Acquisition Integration appeared first on saas.group.

Tim Schumacher – saas.group: 

“I wouldn’t say there’s this one hack. Like with everything else in business, you make decent preparations. I think it’s good to just have your basic numbers ready so that there’s a good appearance to your overall business. Then just have a few conversations without immediately offering the business for sale. 

Have a few conversations with people who are acquirers to fill out what they want and just be like, Hey, I want to have an open conversation.

And then regroup, form your mind, and, so to speak, have a product market fit for an acquisition. If the product, in this case, the company doesn’t fit the market, in this case, the acquirers, then there’s no deal.

Approach an acquisition as you would approach product market fit, talk to a few people before you make your offering, and then go to market. Instead of going to some broker and letting that person figure everything out because that usually doesn’t work.”

Maciej Zawadzinski – PIWIK PRO: 

“I think that the first and most important thing is that you should think about your company in the long term. If you would like to own assets like that, probably the buyer would as well. But if you don’t believe in this business and you want to just sell it, then probably the same vibe will be felt after looking at it closer by the potential buyers. 

The second is to build relationships with people because they may help you when you exit, they might provide a valuable introduction, or they may even buy your business.

And third, make sure when you are discussing with potential buyers that they can secure the money.

Even though most of the deals have some kind of leverage with loans, make sure they have another backup  Make sure they have capital to finance the transaction because it would be a shame if they back out at the last minute because they didn’t get the financing.”

Peter Leonard – MyWorks Software: 

“One of the big reasons that we approached joining the saas.group family was taking a bit of stress off the table for me and having more resources available as we make decisions in the best way. 

So before that, it was quite stressful and lonely sometimes knowing that you’re the one making the decision, even if it’s a hard one.  And with saas.group it’s a really good balance of having more resources and people who want to help with advice, decisions, strategy, and activities going forward while also being there as a partner.

I think it was a comfortable shift from being a solo founder to becoming a CEO and focusing on areas I love the most. It wasn’t anything that I wasn’t prepared for, and any changes were welcome because it helped take stress and some activities off my plate.

So my hack is to find the right founder-acquirer fit to not be sucked into a corporate structure where you are then just another report chain.”

JP Werlin – Pipeline CRM:

“I think for me, the rollercoaster ride of that process was the evolution of what it’s like to actually sell the asset. 

There were days we would wake up and think, it’s done, the deal’s over, because we forgot about this part in our financials, or what happened in 2018, or whatever. 

And that happened, I don’t know, three or four times during the process. And the process with saas.group was relatively dreamlike, like not very shrewd buyers, very smart, intelligent folks.

But you just want to make sure everything’s in the best light, and it’s not always the case. And I think just being transparent and honest gets you so much further.

Point out your mistakes. Don’t let them be discovered. I made a  very concerted effort with Nick to figure out what the gotchas are and what the things are that, if we discovered them, would make us walk away. We didn’t want that to happen during our process.

So I did everything we could to get everything out on the table, especially the bad stuff first.”

Nick Bertolino – Pipeline CRM:

“If there was one piece of advice for going through an M&A process that I could tell my younger self five years ago it would be to get way more organized. 

And it’s not that we weren’t organized, but having every single contract—not just a customer contract, every contract with a vendor, every contract with a customer, every employee agreement—and having all of those and making sure that every single contract is there. 

Make sure that all that paperwork is organized in a Dropbox, a Google Drive, or in a better way. If we did that, it would’ve saved probably several days of work. But it’s just not something that you think about. A lot of SaaS founders are sloppy about it, and we have encountered a little hiccup here and a little hiccup there, as well.

And some of these things could be pretty risky for the acquirer. If you worked with somebody and they’re no longer here, but you never had their employment agreement signed, you’re exposed to potentially having a conflict. And those are the kinds of things that can blow up a deal.

The same thing could happen with some sort of vendor. You built some features, and you used a third party. Where’s the contract? Is it signed? What does it say about IP? Those are the kinds of things that can blow up a deal.”

There are a lot of aspects to the SaaS acquisition, but as Tobias Schlottke points out, it’s initially an honest conversation and not something to be afraid of. Coming to the process prepared and ready to be transparent about the situation in the company is key. That way, you’ll be able to mitigate risks, build strong relationships with your acquirers, and truly establish a partnership where you’ll tackle the challenges together to achieve the best results. 

saas.group offers founders the exit they deserve, providing financial freedom for their next ventures. The company’s commitment to innovation and community growth is reflected in its diverse range of innovative digital products.

If you want to be featured on the saas.unbound podcast, do a live AMA with us, or get some additional information, please contact Anna Nadeina, Head of Growth, at anna@saas.group.

For any M&A questions or interest, reach out to Dirk Sahlmer, Head of Origination, at dirk@saas.group.

The post Founders’ hacks for successful acquisitions appeared first on saas.group.

What are the usual HR data requests during due diligence?

The main objective of gathering as much information as possible is to get to know the company, their team – and how they are employed – as well as to see what HR practices are in place (if any). 

We always request the contracts of all team members and all documents available, e.g. handbooks, policies, org charts, performance overviews, and recent attrition.

Once provided, we analyze the data and prepare questions for the HR interviews. Based on the employment contracts and setup, we assess the potential legal risks and define the changes to be implemented post-acquisition. 

We also do the compensation analysis and see where the company stands compared to the market and if potential increases would be necessary in the near future.

Usually, the smaller the company, the less structured HR data they have. 

What happens next? Is there anything else you take into consideration?

We gather some public data, e.g., I check their LinkedIn to see any employer branding activities or read their Glassdoor reviews. What is the reputation of the company? How do the current/ past employees or candidates see them? Would it have any implications for future hiring? How do they present themselves on their website? Do they have company values, and what are those? Essentially, we are assessing if there is a cultural fit for saas.group.

You mentioned the HR interviews. Can you share more? What happens during the calls?

This is always an exciting time because it’s the first interaction with potential new colleagues! We usually talk with the founders or CEOs – which could be one person. 

At this point, in most cases, the team is not aware of the acquisition, so we can’t interview them. The call mostly focuses on the questions we have about the team and the documents provided.

We always ask about the culture, values, and main HR projects or challenges.

We also try to establish what the team (including the leaders) needs post-acquisition to plan internally. I’m always curious about what reactions leaders expect from their team – this also helps us prepare the best communication strategy going forward.

How to best communicate the deal with your team?

Well, we need to acknowledge that being acquired is usually a stressful event. People are unsure how this will affect their work, their lives, and the company itself. Some people are waiting for the change, and some are really stressed about it. 

We believe in transparency. First of all, we openly discuss the changes with the founders or leaders and align on those before the acquisitions This might include a tough decision of reducing the team or, on the contrary, a hiring plan for the next few months, closing or downsizing the office, etc. Then we create a plan and communicate it openly to the team. 

I really think transparency is the key here. If we commit to something, we need to keep the promise. This approach builds trust in the leaders from both sides—the acquired company and saas.group.

We usually have an All Hands session when we explain why we acquired the company (and why the founders sold it), how we work at saas.group, and what immediate or long-term changes should be expected. During this session, we’re ready to answer any questions that could pop up and explain anything that could be of interest. 

What are the usual changes teams can expect after the acquisition?

The short answer: it depends. Usually, the changes mostly concern the leader or leaders of the company. They now have responsibilities to report to our Board, but they also gain like-minded and talented peers to share their ideas and support each other. We actually aim to connect functional teams across our portfolio so they can share experiences and best practices. 

The leader of the company is still responsible for general performance, the product, and their people. Of course, if we need to let some people go, we might need to change some of the responsibilities of the team members, decide to deprioritize projects or stop something completely.

How often does downsizing happen?

It really depends on the team and the future needs. We made a couple of successful acquisitions where we needed to downsize the team. We also know that some teams are growing in an unsustainable way. 

It’s always tough to say goodbye to colleagues. We need to assess what kind of team would run the company efficiently and profitably and see if all the people are utilized. 

In some cases, the teams were preparing to grow rapidly, which either didn’t happen at all or they grew below expectations, so they have team members who are also needed in a very limited capacity. We need to have an open discussion with the sellers and align on the terminations before the acquisition. We also had some cases when we offered central roles for the team members. I have 2 people on my team who came to us through acquisitions. We were able to keep their jobs and actually provide interesting career opportunities for them, expanding their role to multiple brands.

What is the process and timeline for merging HR systems?

The companies we acquire rarely have HR systems or tools. In the first weeks, we focus on helping the team navigate the company. So we make sure Slack is integrated so that people can see the information about saas.group in Notion and can educate themselves. 

This is when we encourage the teams to connect and start the exchange. We run some workshops to gather feedback and current needs. We also run post-acquisition surveys to see how the team perceives the change and if something needs to be addressed immediately. We encourage new teams to participate in our feedback cycles, but it’s always the decision of the leader when and if to participate. Usually, it takes several months to integrate all the processes.

When it comes to saas.group’s process, are there many changes that teams are facing?

From an operational perspective, the majority of the internal processes stay the same. What I notice are two approaches: 

1. the team needs more structure (e.g. a feedback cycle or regular compensation updates)

2. the team wants to continue with their way of working. 

We trust the teams with the decision to opt in or out. We prefer to act as advisors and not force them. Of course, there are some HR compliance topics we need to observe and work on with the team to implement changes. There is no opt-out for those.

What is the most challenging part of post-integration? 

It’s sometimes challenging to clearly explain how we work as a company. Our setup is somehow unusual. 

The second one is to manage the emotional part of the acquisition for the team. I think it’s crucial for the leaders to define the direction in which the company is going and to communicate it clearly with the team, clarifying who is responsible for what. It’s also super important for us as central teams to keep the promise in terms of hands-on support and advisory. But, all in all, we all have the same goal!

So, there you have it. The HR due diligence process during an acquisition is a complex journey, but we’re at saas.group doing everything to bring transparency to it.

If you want to learn more about technical due diligence or the overall strategy of saas.group acquiring companies, check out our blog posts about it.  If you’re thinking about the potential sale of your company, reach out to start a conversation about how we can fit into your unique story. 

The post HR Due Diligence for SaaS company acquisition appeared first on saas.group.

This is exactly what we discussed with Tobias Schlottke, co-founder and CTO of saas.group to bring more transparency and clarity to technical due diligence for B2B SaaS founders. 

• Can you introduce yourself and talk about the way you joined saas.group?

I’m one of the co-founders of OMR Conference in Hamburg, as well as a CTO community called alphalist, but saas.group is my main focus right now. I’ve been a founder for more than 10 years now and have sold one company to Bertelsmann and one company to Zalando. I have a tech background, so I still love coding and I still love building SaaS products, and that’s exactly why I joined Tim Schumacher and Ulrich Essmann on the mission to become the world’s biggest SaaS conglomerate. 

At first, I joined as an early investor and then quickly became a co-founder and partner. I cover mostly the technical side. I love working with digital products and product companies. And that’s exactly what I do every day. 

• What is saas.group’s new vision?

The new vision is that we want to become the biggest SaaS conglomerate in the world. 

I think it’s doable, and we’re on a good track. 

We have now acquired 17 different companies, and we’re quite happy with the progress. 

We have a lot of amazing people on board, and they really do a great job, providing a lot of central support with all the central functions that we built in saas.group to support the companies we acquired. 

My personal vision is to build a huge knowledge hub. We all want to learn, and we all want to become better at what we do, and I think that is where saas.group could help. The most exciting goal for me is to really provide valuable input on all the different topics that, as a SaaS founder, you often struggle with, like pricing, finance, and all the “boring” stuff that founders don’t necessarily want to deal with. 

To help our brands with that, we have recently even started to bring together an AI team. It’s a huge trend we don’t want to miss, and we see many SaaS companies adopting it. Our mission is to be valuable and helpful whenever we acquire a new company, and even before that.  

• You oversee the technical due diligence. When does it start in the whole due diligence process? And what are founders usually afraid of when it comes to it? 

First, as a founder, you talk to our M&A team. Then, when we’re sure that it will come to a deal, we sign the letter of intent (LOI), and that is a handshake agreement that we are serious about acquiring you. 

At this point, we define the overall terms and the price of the deal. Things like how long the founder will stay with us, how long the earnout will be, and other conditions.

Then, we look deeper into the intellectual property that was created. 

That is what I do with the team, and partly with external consultants. We look at the product and roadmap and talk to the team. We expect to have a deep and honest conversation about going forward and about potential corrections to the deal. 

• Do you expect the founders to communicate the deal to their team? 

It’s a very company-specific situation. It’s good if people who are involved in building the product are notified. But, naturally, you want to keep that circle pretty small because deals fall through, and you don’t want to confuse your team with that. 

• What is the biggest green flag for you? 

I would say having a well-defined roadmap, a pitch deck, an architecture diagram, recent security and cost audits, and a well-performing team. It’s the best thing if the team is motivated and really gets work done. I would say it’s a big check mark. 

• How do you start technical due diligence? 

Before the technical due diligence, we look at whatever is provided, like the tech stack, the cloud that is being used, etc. To get a better feeling for what is there and how good the fit is. It’s about finding valuable information and having an outside perspective on your business and on your technical stack as well, to pave the road forward. 

We typically start with a kickoff meeting where we ask for all the materials that we need. We send a question list to go through. Then founders end up with a big list of questions where we pinpoint the topics where we want to have follow-up conversations. Then we do interviews with the teams. We look at the source code, obviously. So, I would say the better prepared you are for a source code audit, the better it is. So make sure you don’t have credentials in code, big smells in terms of wrongly formatted stuff, and missing documentation. Try to prepare as much as possible for the process to avoid going back and forth. 

• What are the smells and anti-patterns you watch out for?

There are obviously things you could do wrong that we spot early, and we want to see as little as possible. 

The biggest smell from my perspective is a lack of business understanding in the tech team and a non-alignment with the business team. That’s what you find in many companies, unfortunately, especially if the company grows, and it’s a really bad sign. So the better you are aligned, the better it is. 

A couple more things are micromanaging, lack of delegation, and failure to choose the right tools to use within the company. Not the best things to encounter, but nothing unsolvable, either. 

• If you could give one piece of advice to founders on how to prepare for technical due diligence, what would it be?

One thing that every founder should really be aware of is clarity regarding intellectual property. Does your software really belong to you? Founders tend to dislike contractual work, but regardless of how mundane the task is, it’s crucial. 

Whenever you hire a freelancer, make sure you have proper contracts. Not having those would be a big red flag that would turn away almost every buyer. 

Otherwise, if the freelancer realizes that you’re selling and they are no longer with the company but have some sort of access to the source code, you could end up in legal trouble. Make sure whatever is produced at work belongs to you and you have a proper contract to prove it. 

• Do you have a hack for technical due diligence that helps you identify good and bad cases? 

The simplest thing to do is check GitHub. I look at statistics. Who’s contributing what and how much? In many companies, the founder is the one contributing the most, and it’s already a yellow flag because, in most cases, they walk away.

So the easiest thing to do is to just check that and create awareness of how involved the founder is in the day-to-day work of the product. 

Overall, the narrative that we’re trying to push is that we’re looking for transparency in every part of the sales and due diligence process. We are ready to have an honest conversation and expect founders to do the same. 

If we know about the challenges and potential problems beforehand, we have a fair advantage to act on them and fix everything with the founder. Hiding things like that can not only harm the deal but also jeopardize the relationship with your acquirer. No matter how short your earnout period is, you don’t want to do that. Be prepared to work together, and I’m sure anything can be fixed for a good deal. 

If you want to discuss technical due diligence more in-depth or even talk about a potential acquisition of your company by saas.group, you can reach out to me directly on LinkedIn or via email at tobias@saas.group. 

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