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FDD like a Pro – with the world’s busiest SaaS acquirer
Deferred liability or negative equity? Nothing you can throw at me that I haven't already had
Pavel Prokofiev
February 19, 2024
Takeaways from 500 targets (and counting)
I have been doing software M&A for the last 4 years. Of which the last two I have spent looking at small (typically sub $5M ARR) targets. In any given year, I review between 100 and 150 acquisition opportunities.
Tallying up common financial due diligence (FDD) pitfalls, surprisingly the list isn’t that long. In this article I share my top 3.
Consideration #1: Deferred Revenue
SaaS businesses often bill and collect payments in advance. Think of all the enterprise clients on annual plans. This – otherwise laudable – practice results in a) pre-tax cash flows > EBITDA; and b) negative working capital due to large deferred revenue liability.
Since SaaS businesses are commonly valued on an EBITDA basis (trailing twelve months or forecast), by failing to properly defer revenue you risk overvaluing the business. Unfortunately, this happens a lot!
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