How to do due diligence and make an offer?

TL;DR — In this doc, I discuss everything you should look into — financial, technological, marketing, and legal - before making an offer and how to craft a lucrative offer that the maker feels more inclined to sell their product.

How to Make an Offer?

1. Start a Conversation

  • Whenever I come across a great product that I feel like acquiring, the very first thing I do is reach out to the maker and drop a genuine compliment. Acknowledging the efforts of the maker creates a positive and collaborative atmosphere and doesn’t leave the maker feeling threatened.
  • Remember: You are not trying to bring the product down or behaving like a shark to acquire the business. You are genuinely impressed by the product and you are taking time to convey how you like it.
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The point here is to get the conversation started and to build a relationship through trust.

2. Be Curious and Ask Questions

  • I like to ask questions about the product’s history, achievements, and the challenges it faces. This helps me show my interest and also gather crucial details about the product itself. Founders generally love to talk about what they created, so I figure it’s an easy way to ask questions.
A quick tip: Start by asking questions that are easy to answer and require low effort to respond. So don’t ask for full stats/analysis right away.
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3. Communicate Your Intent of Purchase

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Once I have set the tone of the conversation, I clearly express my interest in buying the product. I believe transparency establishes trust and sets clear expectations.
Something I have noticed – At first, it’s common for the makers to say “No” because, let’s be honest, we all love the things that we build from scratch, and it is hard to let go of it.
If this happens to you too, consider it “normal” and:
  • Respect Their Decision: Not all owners are willing to sell immediately.
  • Plant the Seed for Future Communication: Even if the answer is No, I maintain a friendly relationship and keep the door open for future interactions.
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Timing Matters

Timing plays a key role. When the product is newly launched or is doing very well, the founders are enjoying and may refuse to sell. But when things start to go south, founders tend to get more willing to talk about selling. Here’s how I handle it:
  • Follow-Up: after expressing my interest, I follow up periodically without being too pushy. Owners usually remember interested buyers, and when they eventually decide to sell, they often reach back.
  • Keep an eye on industry news and the business's progress. Knowing when the business might face challenges or reach a turning point helps me time my follow-ups effectively.
  • Don't limit yourself to just one potential seller. Expand your network of SaaS owners, and you will find other opportunities.
    • Ex: when in talk about acquiring Typeframes, I was also discussing about another video editing SaaS but we couldn’t find a deal.
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In the world of SaaS acquisitions, building relationships is the key. It's not just about the offer; it's about creating a long-term mutually beneficial partnership.

Tips to do the due diligence right

While you are discussing terms and engaging in negotiation, you can get started with the due diligence process.
Quick Tip: Seek startups that surpass your initial pricing constraints. While it is customary to engage in negotiations with the seller, a smart buyer will also explore avenues for pricing concessions through earn outs and seller financing, or loans.

Technical Due Diligence

If you can’t assess the code quality yourself, I strongly recommend getting help from someone who can. The quality and maintainability of the code will drastically change your acquisition experience. A premium SaaS business should have a clean, somewhat documented, and annotated source code. Make sure it’s stable and not a ticking time bomb, of if it’s not, make sure it’s part of the deal and that it lowers the valuation. Getting saddled with bad code could set you back a full year.
Take a look at:
  • Technical Debt: Accruing technical debt gets worse over time. Make sure you understand its current state.
    • Try to understand how hard it is going to be to update the code.
    • Ask for the ugliest part of the codebase.
    • Ask for the most complex.
  • Infrastructure: Examine things like the company’s servers or data storage. Ask about:
    • The uptime of the last X months
    • The procedure to push code to production
  • Data Security: How sensitive are data? Try to understand how user data are protected and what is the authentication system in place.
  • Integration Capabilities: Make sure the integration capabilities align with the business needs and will support future growth or else you are in for a huge headache.
  • Ask for all services/APIs/dependencies that the product relies on.
Look for vulnerabilities and inefficiencies in the code. If not taken care of at the right time, the migration can take forever and your team might end up putting a fork in their heads.
From John Rush on “what to check”: ”Study the product uptime. The uptime is the most crucial. Most saas tools don't even know their stats on uptime. So ask them to setup uptime monitoring and wait for a months to see how does it look like.”

Financial Due Diligence

Review their P&L, cross-check the data with bank and credit card statements, and make sure the income and expenses match. Get access to their Stripe account (this is a deal break for me if they don’t share view-only access).
Always take the time to check the billing history of a few customers manually. Pick them randomly and check if anything looks weird.
If you don’t come from a finance background, and if the deal size is quite consequent, consider hiring an accountant or an expert to ensure the company’s workings are in order. If you have found the company through a good broker like Acquire, the broker platform has likely done preliminary due diligence and the seller has their books in order.
It's often a smart move to start fresh and create your own P&L statement. Compare it with the founder’s to identify any discrepancies. It may sound like a huge effort, but it is worth the cost.

A comprehensive DD report would cover:

  • Detailed review of P&L, balance sheet, and cash flow
  • In-depth review of historical revenue and profit trends
  • Quality of earnings and net debt

Things to consider:

  • Put the product’s churn rate under a microscope. If the churn is high, you’ll lose the existing customers quickly and will have to spend on marketing.
  • Get access to the payment platform (like Stripe) and make sure the metrics shared are correct
  • Pick a sample of the customer and look at their demographic data. Do they look legit? Is it inline with what was shared?
  • Look at outliers: Are there spikes of new subscribers or churn? If yes, ask why.

  • Ask the seller to provide all running contracts
  • Make sure domain name transfer is included in the deal
  • If relevant, make sure the seller owns the property rights, trademarks, and copyrights. You don’t want to buy something that the seller doesn’t actually own.

Marketing Due Diligence

Are they spending any money to acquire their customers?
If so, dig in and understand their CAC. Review where they are getting their customers from and whether that channel will remain active after you take over. Also, wrap your head around the size of the market, the competitive landscape, and the trends that may impact the business. Trends may include things like shifts in customer demand, changes in technology, and regulatory developments.

Things to consider:

  • Are they artificially growing because they are pumping tons of money into ads?
  • Keep in mind: the less acquisition channels the seller has explored, the better, as it’s more growth opportunities for you
For small acquisitions, consider starting the Due Diligence with a simple LOI over email. Here’s a template that you can follow:
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