Diligence
Diligence is hard. Here are some tactics / useful tips we've used to stumble our way through it 3 times. Scroll to the end for 50+ diligence questions.
Our group has bought one company from micro acquire and 2 others not on micro acquire (One was from Twitter and the other was from Indie Hackers). I also just did an interview with Andrew from Micro Acquire where I touch on this. I'll link to it here when it's out.
Obvs this isn't legal / tax advice... hire a lawyer, hire a cpa, blah blah blah, etc.
My company does B2B SaaS so everything in here is focused on that. This also is for smaller deals. Let's say between $100k to $500k. Anything more and I'd get my CPA involved to sanity check my interpretation of their financials, and my lawyer involved to go over any contracts they've signed with customers to understand liabilities. We do have a partner on the team who is in private equity (real estate) and he's super helpful on the financial stuff.
We do have a list of questions we took / tailored from the microacquisitions.com course which all 4 of the parters took before we bought our first one. I'd recommend the course if you're serious about doing this. It has some decent legal docs and walks you through the whole process.
High Level
- Get on a zoom call. Do you get good vibes or shady vibes? There are all kinds of people out there.
- Get on a zoom call with 3 of their biggest customers (by revenue). Just frame it as if you were a potential customer. People are usually fine with this. If they're not, that's a little weird. Maybe not a deal breaker, but a red flag. Do the customers hate the product? Will they stay if you take over? How good of a relationship does the owner have with their biggest customers?
Financials
People mostly ask for 2 years of Profit / Loss (P/L). P/L can be hard to read and hard to interpret if you're weak (like I am) on financial stuff. Don't worry about fancy terms like SDE or EBITDA.
"I don't like when investment bankers talk about EBITDA, which I call bullshit earnings." - Charlie Munger
Just get the important things:
- how much are they spending on things (all in, what's it take to run the business)?
- how much are they taking in?
- What's the profit margin?
- Do they have any lifetime deals you have to support (these are liabilities for you)?
- Is revenue lumpy? Could be due to annual subscriptions.
- Do they have high customer concentration? i.e. do their top 3 customers represent more than 50% of the business? You'll need a comfort level with that.
- What does it cost to acquire a customer?
- How long do customers stay (LTV)?
- Churn rate - Churn sucks.
An easy way to get some of this is to do a screen-share where they show you their stripe dashboard so you can verify all the revenue. Also ask for a bank statement to make sure what's coming in from stripe is actually making it into the bank. This may also be done via a screen-share.
Tech
This is so hard. If it's just you, and it's a SaaS business, just stick to languages you know really well. You're going to be buying a job. Looking at random files in a screen-share is super hard to say definitively whether or not the thing you're buying is a work of art or a piece of shit stitched together with duct tape. We've been burned here before
- What's the uptime? If it's not 99.9 they better have a good answer
- What's the deployment process?
- What's the architecture? Have them draw you a diagram.
- What's the first thing that s going to break if you 100x the usage? All systems have choke points, just know what this is beforehand.
Other Considerations
- Will they support you for 3 months after the sale?
- Will they be available at an hourly rate to help with issues? mostly this is a no, but sometimes it's a yes.
- Do they have any contractors they've used on the project that they could intro you to?
All that being said, diligence is a balance. If you ask more questions than another party that puts a bid in, you might loose because you were 'asking too many questions'. We had one where we didn't do that much diligence because they were a Y-Combinator backed company. That was a big mistake.
Also, cautionary note. You're going to be wrong, and you're buying a job. I'd partner up with some friends (or random people on indie hackers / trends.vc / etc like I did :) and I'd start small... And dear god just buy one at a time. We did 3 at a time and it was foolish.
50+ Diligence Questions For Micro Acquisitions
| 1 | Process | Why are you selling? |
| 2 | Process | Would you be willing to sign a non-compete? |
| 3 | Process | Please confirm this is a sale of 100% ownership. |
| 4 | Operations | Do you believe the current footprint (team size, roles, structure) is ideal for streamlined operations? Where are the opportunities, if any? |
| 5 | Operations | What kind of support can I expect from you post-sale? Will there be a period during which I can ask you questions? |
| 6 | Operations | What operational performance metrics are available? Example: crash rates, customer service tickets per week |
| 7 | Operations | What are your top security concerns/risks? Please describe previous security bugs and the way it was resolved. Describe any security protocols. |
| 8 | Operations | Describe any server crashes, hacks, major bugs and their resolution. |
| 9 | Operations | Describe any pricing changes made in the last 12 months and the rationale. How did this affect demand? |
| 10 | Operations | Have you experimented with pricing? When was your last price raise? What was the customer reaction? |
| 11 | Operations | How much of startup costs did you accrue? |
| 12 | Operations | What is your refund policy? |
| 13 | Market | Who are your top competitors and how do they compare in pricing, product offering and size? |
| 14 | Market | How has the competitor landscape changed overtime? |
| 15 | Market | What are the main reasons a customer would switch to a competitor? |
| 16 | Market | Are there any adjacent / substitute products that you have lost customers to? |
| 17 | Financials | Are there any debts or liabilities with the business currently? |
| 18 | Financials | What assumptions were made to form your projections? Are there any specific wins, features, price increases, contracts, cost reductions, personnel changes, etc. that are necessary in order to achieve your growth scenario? |
| 19 | Financials | What are one-time costs (marketing agency, PR campaign, large equipment expense, etc.) you've made over the past 12 months. What was the rationale and the ROI for each? |
| 20 | Financials | Which expenses are fixed vs variable costs? |
| 21 | Financials | Are your sales seasonal? |
| 22 | Financials | Can you provide monthly revenue and expenses for the last 12 months? Please include a breakdown of expenses. |
| 23 | Financials | Approximately what percentage of your revenue is one-time vs recurring? |
| 24 | Growth | What do you think are opportunities for revenue growth? If you had $1,000 to spend on the growth of this business, what would be the first 3 changes / improvements / etc. you would make? |
| 25 | Growth | What do you think are opportunities for cost reductions? |
| 26 | Growth | Are there any customers that make up >=10% of your sales? |
| 27 | HR | If any roles are outsourced, what was the rationale for this? |
| 28 | HR | How much time do you spend on the business? What are your responsibilities? |
| 29 | HR | Please provide a list of all current team members, titles, wages, and responsibilities, including contractors and employees. |
| 30 | Legal | Have there ever been any legal issues associated with the business? |
| 31 | Marketing / Advertising | Which marketing / ad channels have you tried and can you describe conversion performance for each? What do you think generally works vs doesn't work? |
| 32 | Marketing / Advertising | How much do you spend on marketing? |
| 33 | Marketing / Advertising | Are there any marketing / ad channels that will not be transferrable to a new owner? |
| 34 | Marketing / Advertising | What are your traffic stats? How have they changed overtime? What is the split across direct, organic, ads, referrals, etc.? |
| 35 | Marketing / Advertising | Do you offer discounts or promotions? How did they perform? |
| 36 | Marketing / Advertising | If you send out a newsletter, how many subscribers do you have? What is your click through rate? |
| 37 | Marketing / Advertising | Do you have affiliate or referral partners? What are the terms of your contracts? |
| 38 | Marketing / Advertising | How do you track conversions? |
| 39 | Marketing / Advertising | Describe your SEO strategy. What are your major sources of SEO traffic? |
| 40 | Product | Please provide a list of all products / plans / services, how they are priced, and current customer count. |
| 41 | Product | What is your tech stack? |
| 42 | Product | Do you have any Intellectual Property for your product / design / etc.? |
| 43 | Product | Are there any feature builds on your wish list? |
| 44 | Product | What kind of knowledge base / documentation do you have? |
| 45 | Customers | Please provide granularity for customer count by product type (ie. free plan, pro plan, etc.) over the last 12 months |
| 46 | Customers | What are the terms of your customer contracts? |
| 47 | Customers | What are your customer churn metrics and what are top reasons a customer would leave? |
| 48 | Customers | Who is your ideal customer? |
| 49 | Customers | What are most common customer requests / complaints / issues? |
| 50 | Customers | What is the average lifetime value of a customer? |
| 51 | Customers | Do you think there will be difficulties with customer relationships post-sale? |
| 52 | Suppliers/Vendors | Are there any vendors / integrations that you depend on? |
| 53 | Suppliers/Vendors | What are the terms (expiration dates, pricing structure, renegotiation opportunities, etc.) of your supplier contracts? How have terms changed over time? If none, leave blank |
Good luck out there. Let me know how it goes!
Also, I'm starting a podcast. It's called 'Fund Stuff'. We're going to talk about 'Fund Stuff'. If you know someone that would be good to bring on, shout at me on twitter @andrewpierno