SaaS · Software · Buying a business
Buying a SaaS Business? Recurring Revenue Is a Claim Until the Evidence Says So.
Before you buy a SaaS business, reconcile the recurring revenue on the dashboard to the revenue on the P&L, find out what customers prepaid for and are still owed, and ask for proof behind every development and contractor cost the seller calls one-time. Subscription revenue feels permanent. It is a promise customers can cancel.
A SaaS listing comes with two numbers: a recurring-revenue figure from the metrics dashboard and an earnings figure from the books. They rarely come from the same records. This page covers where each one runs ahead of the evidence, what to ask, and what a TrueQoE First Pass checks.
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By Mark Hirsch, Founder, TrueQoE · Managing Member, Strategic Lever LLC — buyer, seller, operator, and advisor across lower-middle-market transactions.
What claim does a SaaS listing usually make?
Short answer: Two at once. A recurring-revenue figure, MRR or ARR, presented as durable and growing, and an earnings figure, SDE or adjusted EBITDA, after add-backs for the founder's pay and development described as one-time. The pitch is that the product is built and the revenue renews. The evidence for each half lives in different places.
The recurring-revenue figure comes from a billing system or a metrics tool, and its definition is whatever that tool counts. The earnings figure comes from the books, which may run on a cash basis and may record an annual prepayment as a single month's revenue. Between the two sit refunds, price concessions, paused accounts, setup fees and services that bill once and never again.
Meanwhile the cost side often understates what the product takes to keep running. The founder writes code without a market salary. A contractor overseas maintains the integration nobody else understands. Development spend is moved to the balance sheet, or added back as a rebuild that's finished.
- Reported profitReported
- Founder's salaryDocumented
- Development costs capitalizedNeeds support
- Contractors "no longer needed"Needs support
- "One-time" platform rebuildUndocumented
- Claimed adjusted EBITDA
Illustration. Step lengths are not data from any business.
Which SaaS add-backs and revenue patterns most often don't hold up?
Short answer: Five. Recurring revenue that includes things that don't recur, or hides churn. Prepaid revenue counted as earned. Development costs moved off the P&L. Contractor and founder labor the product can't run without. And a customer base that is really a few customers.
Churn and recurring-revenue quality
“Recurring” is a definition, not a fact. A dashboard figure can include annual plans on a monthly basis, reduced-price or free accounts, setup and services revenue, and customers who have stopped paying but haven't been cancelled. Growth can hide churn: new sales cover the customers leaving.
The test is reconciliation: dashboard revenue to billing records, billing records to bank deposits, and bank deposits to the P&L, month by month.
Deferred revenue
An annual plan paid in advance is cash for service still owed. On cash-basis books it shows up as revenue the month it's collected, so a push to sell annual plans can make one year look better than the business is. At closing, the buyer inherits the months still owed to those customers, and someone has to decide who pays for delivering them.
Capitalized development
Development costs can be recorded as an asset instead of an expense. That's a legitimate accounting choice, and it also raises EBITDA. If the policy changed during the years the price relies on, or the “capitalized” work is really ongoing maintenance, the earnings figure carries a cost the P&L no longer shows.
Contractor vs. employee costs
SaaS companies often run on contractors, and sellers often add contractor spend back as one-time: the rebuild is done, the migration is finished. Sometimes it is. Sometimes the same contractor is still the only person who can deploy. And the founder who writes code for no salary is a cost the buyer will have to pay to replace.
Customer concentration
A SaaS business with a long customer list can still earn most of its revenue from a handful of accounts, or from one channel partner or marketplace. Check who the largest customers are, what their contracts say about renewal and termination, and whether any of them can leave when the founder does.
What should you ask a SaaS seller before the LOI?
Short answer: Ask the seller to reconcile the recurring-revenue figure to the P&L, explain how prepaid plans and development costs are recorded, name who builds and maintains the product, and show the paper behind each add-back.
- Can you reconcile MRR or ARR on the dashboard to revenue on the P&L, month by month?If the seller can't, neither number is ready to price on.
- How much revenue is subscription, and how much is setup, services or one-off?
- How do you count churn, downgrades, paused accounts and refunds, and what does the monthly history show?The definition matters as much as the figure.
- How are annual prepaid plans recorded, and how much service will customers be owed at closing?
- Has any development cost been capitalized, and under what policy, in each year?
- Who writes, deploys and maintains the code, how are they paid, and who owns what they wrote?Ownership of the code is a question for your attorney.
- Who are the largest customers, and what do their contracts say about renewal, termination and assignment?
- For each add-back, what document supports it?A contractor's statement of work and final invoice. A payroll record. "The rebuild is done" is a claim.
The full request list is in the SaaS due diligence checklist.
Where does a TrueQoE First Pass help on a SaaS deal?
Short answer: On the earnings half of the claim. A First Pass ties each year of the seller's P&L to that year's stated totals, labels each add-back, such as “one-time” development, contractors or the founder's pay, Documented, Needs support or Undocumented, and lists the records missing from the package. Cohort and churn analysis is guidance, and so are MRR reconciliation, deferred revenue and capitalization policy.
That fits how SaaS deals actually get tested. The revenue metrics need the billing system and someone who knows how to read it. The earnings add-backs need documents, and a First Pass tells you which ones already have them.
What a First Pass reports
- Each year of the P&L tied to that year's own stated totals, with any gap shown.
- Each add-back, such as "one-time" development, contractors or the founder's pay, labelled by its evidence and pinned to its source line.
- A list of records missing from the package.
Guidance for you and your advisors, not a First Pass output
- MRR and ARR definitions, and reconciliation to the P&L and the bank.
- Churn, retention and cohort analysis.
- Deferred revenue and revenue recognition.
- Development capitalization policy.
- Customer concentration and contract terms.
- Code ownership, contractor agreements and classification.
Every adjustment in the report lands in one of three states:
- Documented
- the adjustment traces to source records.
- Needs support
- the adjustment is plausible, but the evidence isn't in the file yet.
- Undocumented
- there is nothing behind it.
What a First Pass is not. It works from the documents you upload and does not verify that seller-prepared records are authentic. It is not an audit, review, compilation, valuation, legal or tax opinion, or a Quality of Earnings report, and it does not satisfy a lender's Quality of Earnings requirement. It does not check returns with the IRS or test bank deposits.
Frequently asked questions
Are SaaS businesses valued on revenue or on earnings?
Either, depending on size, growth and who is buying. Smaller, owner-run SaaS businesses are often priced on SDE or adjusted EBITDA; faster-growing ones are often priced on recurring revenue. Both figures are claims a buyer can test: earnings against the P&L and its add-backs, recurring revenue against the billing records behind it.
Why doesn't MRR on the dashboard match revenue on the P&L?
Because they measure different things. A metrics dashboard counts active subscriptions at a moment in time and may include reduced-price, paused or not-yet-paid plans; the P&L records revenue under the books' accounting method. Annual prepayments, refunds, setup fees and services all move one without the other. Ask the seller to reconcile the two month by month before you rely on either.
How does deferred revenue affect a SaaS acquisition?
When customers prepay annual plans, the business holds cash for service it still owes. On cash-basis books that cash shows up as revenue when it's collected, which can flatter the year it lands in, and at closing the buyer inherits the obligation to deliver the remaining months. How deferred revenue is treated in the price and working capital is a question for your CPA and attorney.
Which SaaS EBITDA add-backs need the most evidence?
Development described as one-time, contractors the seller says won't be needed, the founder's pay when the founder is also the lead developer, and software or hosting costs called personal or temporary. Each is legitimate only if the records support it and the work, or the cost, won't come back under a new owner.
Does a TrueQoE First Pass analyze churn, cohorts or MRR?
No. A First Pass ties each year of the seller's financials to its stated totals, labels each add-back Documented, Needs support or Undocumented, and lists missing records. Churn, cohort, MRR and deferred-revenue analysis is guidance for you and your advisors, not a First Pass output. A First Pass is not a Quality of Earnings report.