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Diligence

Diligence is hard. Here are some tactics / useful tips we've used to stumble our way through 3 micro saas acquisitions. Check out our 50+ diligence questions.

Andrew Pierno

Andrew Pierno

— 6 min read
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

1ProcessWhy are you selling?
2ProcessWould you be willing to sign a non-compete?
3ProcessPlease confirm this is a sale of 100% ownership.
4OperationsDo you believe the current footprint (team size, roles, structure) is ideal for streamlined operations? Where are the opportunities, if any?
5OperationsWhat kind of support can I expect from you post-sale? Will there be a period during which I can ask you questions?
6OperationsWhat operational performance metrics are available? Example: crash rates, customer service tickets per week
7OperationsWhat are your top security concerns/risks? Please describe previous security bugs and the way it was resolved. Describe any security protocols.
8OperationsDescribe any server crashes, hacks, major bugs and their resolution.
9OperationsDescribe any pricing changes made in the last 12 months and the rationale. How did this affect demand?
10OperationsHave you experimented with pricing? When was your last price raise? What was the customer reaction?
11OperationsHow much of startup costs did you accrue?
12OperationsWhat is your refund policy?
13MarketWho are your top competitors and how do they compare in pricing, product offering and size?
14MarketHow has the competitor landscape changed overtime?
15MarketWhat are the main reasons a customer would switch to a competitor?
16MarketAre there any adjacent / substitute products that you have lost customers to?
17FinancialsAre there any debts or liabilities with the business currently?
18FinancialsWhat 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?
19FinancialsWhat 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?
20FinancialsWhich expenses are fixed vs variable costs?
21FinancialsAre your sales seasonal?
22FinancialsCan you provide monthly revenue and expenses for the last 12 months? Please include a breakdown of expenses.
23FinancialsApproximately what percentage of your revenue is one-time vs recurring?
24GrowthWhat 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?
25GrowthWhat do you think are opportunities for cost reductions?
26GrowthAre there any customers that make up >=10% of your sales?
27HRIf any roles are outsourced, what was the rationale for this?
28HRHow much time do you spend on the business? What are your responsibilities?
29HRPlease provide a list of all current team members, titles, wages, and responsibilities, including contractors and employees.
30LegalHave there ever been any legal issues associated with the business?
31Marketing / AdvertisingWhich marketing / ad channels have you tried and can you describe conversion performance for each? What do you think generally works vs doesn't work?
32Marketing / AdvertisingHow much do you spend on marketing?
33Marketing / AdvertisingAre there any marketing / ad channels that will not be transferrable to a new owner?
34Marketing / AdvertisingWhat are your traffic stats? How have they changed overtime? What is the split across direct, organic, ads, referrals, etc.?
35Marketing / AdvertisingDo you offer discounts or promotions? How did they perform?
36Marketing / AdvertisingIf you send out a newsletter, how many subscribers do you have? What is your click through rate?
37Marketing / AdvertisingDo you have affiliate or referral partners? What are the terms of your contracts?
38Marketing / AdvertisingHow do you track conversions?
39Marketing / AdvertisingDescribe your SEO strategy. What are your major sources of SEO traffic?
40ProductPlease provide a list of all products / plans / services, how they are priced, and current customer count.
41ProductWhat is your tech stack?
42ProductDo you have any Intellectual Property for your product / design / etc.?
43ProductAre there any feature builds on your wish list?
44ProductWhat kind of knowledge base / documentation do you have?
45CustomersPlease provide granularity for customer count by product type (ie. free plan, pro plan, etc.) over the last 12 months
46CustomersWhat are the terms of your customer contracts?
47CustomersWhat are your customer churn metrics and what are top reasons a customer would leave?
48CustomersWho is your ideal customer?
49CustomersWhat are most common customer requests / complaints / issues?
50CustomersWhat is the average lifetime value of a customer?
51CustomersDo you think there will be difficulties with customer relationships post-sale?
52Suppliers/VendorsAre there any vendors / integrations that you depend on?
53Suppliers/VendorsWhat 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

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