When it comes to discussing the due diligence process for a SaaS company acquisition, founders always remember the tech, legal, and financial aspects of it. Marketing is either overlooked or bundled with another type of assessment. At saas.group, marketing due diligence has its own timing and meticulous process that includes an examination of marketing facets, revealing the crucial questions, metrics, and potential red flags that shape the success of such transactions. Tim Heicks, the Brand CMO at saas.group offers invaluable insights into the marketing due diligence within the SaaS acquisition process.
What is marketing due diligence in the SaaS acquisition process? And why is it crucial?
In a due diligence process, we thoroughly examine all aspects of a business that impact its future success. This helps us identify both risks and opportunities. Marketing is especially important to analyze because it directly affects both costs and revenues.
The impact of marketing on future revenues can and should be quite substantial and therefore it needs to be analyzed carefully. Having said that, the impact on short-term revenue and Monthly Recurring Revenue (MRR) can be limited if the business has already achieved a substantial MRR from existing customer cohorts. This also means a company that grows in MRR quite substantially can quickly turn into revenue stagnation if the New Logo MRR is declining.
Besides the impact on revenues, of course, we also need to understand the expense side, be it salaries for the marketing team, costs for external freelancers and agencies, SaaS tool expenses, conference and trade show fees, and occasionally, significant paid advertising budgets. Marketing costs often have a significant impact on margins and cash flow and need to be analyzed accordingly.
What are the usual questions that are being asked?
We have a comprehensive set of questions that can be extensive. They’re often tailored based on our initial review of the business, its product, pitch deck, and other public information.
However, some common questions include:
- Who is in charge of marketing and sales within the company? Is it mainly led by the founder in collaboration with selected freelancers or agencies, or is there a dedicated team of marketers in place? How is the connection between the marketing and sales department? To what extent does the company’s growth hinge on the founder’s personal network, character, or brand identity?
- What has been the growth trajectory of the company in the last 4-5 years, particularly with newly acquired customers, and what are the primary drivers of this growth? It’s essential to consider how industry-specific factors like COVID-19 have created unusual spikes or declines in growth. We also look at how other internal and external disruptions have affected New MRR. Such disruptions might include significant platform changes for businesses reliant on specific platforms, rebranding initiatives, the removal of a blog from the company website, or the emergence of a new, well-funded competitor.
- What is the projected marketing strategy moving forward? Where does the company see the most potential for attracting new users and growing its customer base, and what are the obstacles in realizing this potential?
- As mentioned, understanding the cost structure of marketing is also crucial. What factors drive these costs? How much of the marketing expense is recurring? Are there any long-term contracts that lack flexibility? What is the salary range for the existing marketing team?
- Additionally, we closely examine the marketing technology stack. How is the tracking setup configured? Which CRM system is in use, and how is it structured? What Content Management System (CMS) is being used for the website, and how much autonomy does the marketing team have in making site alterations? Are there any tool or service expenses where we could apply immediate discounts due to negotiated group deals?
- From the responses to the above questions, we formulate specific queries for each marketing discipline. Our central marketing team includes specialists in SEO, Content, PPC, and Affiliate Marketing, each equipped with detailed questions to assess the current state, potential opportunities, and risks associated with each channel. For instance, if a business invests heavily in Google, LinkedIn, or Facebook Ads, we delve deeper into these accounts to understand the strategies and financial outcomes, like the time it takes for these cohorts to reach break-even. In SEO, for example, if the company’s blog is a crucial source of traffic and leads, we scrutinize the backlink profile and historical backlink-building practices to determine if current rankings might be at risk from potential Google spam updates affecting existing backlinks. This detailed approach extends to every discipline within marketing.
What are the most important metrics that are being assessed?
We pay close attention to New MRR by month, its growth, and the factors influencing it. This includes examining peculiar patterns, like significant benefits from Black Friday promotions. We also look at customer acquisition cost (CAC), return on ad spend (ROAS), cost per lead or signup (CPL/CPS), conversion rates (CVR), user and customer retention, and various channel-specific KPIs.
What are the red flags for the acquirers that can be discovered in marketing DD?
So far, we haven’t identified major red flags during marketing DD. However, a potential concern could be discovering that a company has achieved top organic search positions, generating significant traffic and leads, but is part of a questionable link network with risky backlinks and spammy content that hasn’t yet been penalized by search engines.
What are the steps of marketing due diligence, and how long does it usually take?
Typically, either I or my Co-CMO Julian participate in a preliminary call before the actual DD, gathering initial insights. We then conduct a focused marketing call to understand the marketing setup and the founders’ perspectives on current challenges and opportunities. The actual DD process then usually takes 1-2 weeks, during which we maintain communication with the founders to access data and clarify questions. The DD concludes with another call to present our findings and write a comprehensive Marketing DD report for our M&A team.
Founders tend to keep the due diligence process quiet, but ultimately, the more aspects are assessed, the more people are involved. Who is involved in the marketing due diligence?
In most cases, we only communicate with the founders. This can be challenging if there’s a Head of Marketing who isn’t informed and cannot be involved in the DD, especially if the founder isn’t deeply engaged in marketing. In some instances, we also need to clarify technical aspects, which may involve the CTO.
Can you share some horror stories / bad practices that affected the deals?
It’s not exactly a horror story, but a significant challenge arises when we don’t have direct access to live tools and have to rely on screenshots for information, such as from Google Analytics or Google Ads. This can become time-consuming and frustrating for both parties, as it requires back-and-forth communication for additional details and clarifications.
How would you recommend founders prepare for marketing due diligence?
Founders don’t necessarily need to prepare in advance for a marketing DD, as we guide them through the process. However, being familiar with the answers to the questions we’ve outlined can be beneficial for assessing the overall health of their marketing operations, even outside of a DD context.
Do you have any hacks that you could share that would help founders and teams go through the process more smoothly?
Honesty and transparency are key. If we discover that information has been withheld during the DD, it can lead to mistrust and potentially jeopardize the entire transaction. For example, if churn rates have been artificially reduced through significant discounts, this should be disclosed upfront.
In the fast-paced world of SaaS acquisitions, it is important to understand every aspect that goes into the M&A process. Marketing due diligence is nuanced and helps uncover interesting considerations that go into evaluating a SaaS business’s marketing activities. At saas.group, we emphasize transparency, setting the right metrics, and collaborative engagement with founders.
If our values speak to you and resonate with how you do business, get in touch. Discuss your options with our M&A team: Dirk (email@example.com) or Pavel (firstname.lastname@example.org). Learn more about how we grow acquired brands on our blog and podcast pages.