SaaS · Checklist · Pre-LOI
The SaaS Due Diligence Checklist: Reconcile the Dashboard to the Books
A SaaS seller can show you a dashboard in a minute. This list is for the records behind it, and for who should read each one.
By Mark Hirsch, Founder, TrueQoE · Managing Member, Strategic Lever LLC.
Work through it in order. The financial records come first because they are what every later question gets checked against: if the dashboard and the books don't meet, you want to know before you've paid anyone to explain why.
How to read the tags. “First Pass reports this” marks the only items a TrueQoE First Pass covers: tying each year to its stated totals, labelling each adjustment by its evidence, and listing missing records. Every other tag names who should check the item. Those items are guidance, not First Pass outputs.
Which financial records should a SaaS seller provide first?
Short answer: The P&Ls, balance sheets and tax returns for every year the price relies on, monthly P&Ls, and the add-back schedule.
- Annual P&Ls and balance sheets for each year the price relies onEach year should agree with its own stated totals.First Pass reports this
- The seller's add-back schedule, line by lineEach add-back gets an evidence label and is pinned to its source line.First Pass reports this
- Monthly P&Ls and the accounting methodCash-basis books record a prepaid annual plan in the month it's collected.Your CPA
- Business tax returns for the same yearsDifferences from the P&L need an explanation.Your CPA
How do you check MRR, ARR and churn?
Short answer: Get the raw subscription records, not just the dashboard, and have the seller reconcile them to the P&L and the bank.
- A subscription export from the billing system: customer, plan, price, start, cancellationThe records the dashboard is built from.You · Your CPA
- A month-by-month reconciliation of MRR to P&L revenue and bank depositsRefunds, price concessions, setup fees and prepayments live in the gap.Your CPA
- The seller's definitions of MRR, churn and active customerA figure is only as meaningful as what it counts.You
- Monthly new, expansion, contraction and churned revenueGrowth can hide churn.You · Your CPA
- Revenue split between subscription, setup, services and one-offOnly one of those recurs.Your CPA
What should you check about deferred revenue and capitalized development?
Short answer: Find out what customers have prepaid for and are still owed, and whether any development cost has been moved off the P&L.
- Annual and multi-year prepaid plans, with the service still owed at each month-endThe buyer inherits the obligation to deliver it.Your CPA · Your attorney
- The development capitalization policy, and amounts capitalized each yearCapitalizing raises EBITDA; a policy change mid-period moves the trend.Your CPA
- Hosting, infrastructure and third-party software costs by monthCosts that scale with customers belong in the margin.You · Your CPA
Who builds the product, and what does it really cost to run?
Short answer: List everyone who writes, deploys, supports and sells the product, including the founder and contractors, and what each is paid.
- Support for any development or contractor cost added back as one-time: statements of work, final invoicesLabelled by the evidence in your upload.First Pass reports this
- Support for the founder's pay add-backEach add-back is labelled Documented, Needs support or Undocumented.First Pass reports this
- Who writes, deploys and supports the code, and how each is paidIf the founder does it unpaid, that's a cost you'll take on.You
- Contractor agreements, including IP assignmentWho owns the code they wrote.Your attorney
- Anyone paid as a contractor who works like an employeeClassification affects cost and risk.Your CPA · Your attorney
What about customer concentration and contracts?
Short answer: Name the largest customers and channels, and read what their contracts allow.
- Revenue by customer for the largest accounts, by yearA long list can still be a few customers.You · Your CPA
- Contracts for the largest customers: term, renewal, termination, assignmentSome may be able to leave on a change of control.Your attorney
- Revenue through marketplaces, app stores or channel partners, and their termsA platform can change its terms on you.You · Your attorney
- Anything the First Pass lists as missingSend the list to the broker as your next request.First Pass reports this
A seller who can reconcile the dashboard to the books in an afternoon is telling you something good about the business. A seller who can't is telling you where to spend your diligence budget.