Due diligence
Due diligence is the investigation a buyer or investor does of a company before closing, checking the financials, customers, code, legal records and ownership.
Due diligence is the verification phase between agreeing terms and closing. The buyer or investor checks that what you told them is true. Findings can change the price, add conditions such as an earnout, or end the deal. Founders who prepare ahead lose less time and less leverage.
What gets reviewed in a SaaS deal
A practical checklist from HelloExit's guide to selling a SaaS business and similar broker guides covers:
- Financials. MRR and ARR by month and customer, billing and payment processor exports, revenue recognition, and tie-outs between invoices and cash.
- Customers. Churn and cohort data, a top-customer schedule, key contracts, and assignment or change-of-control clauses. Buyers look hard at customer concentration.
- Product and code. Repository, deployment process, infrastructure, security practices, third-party licenses and known technical debt.
- Legal and IP. Written IP assignments from every contractor who built part of the product, trademarks, and your cap table.
- Operations. What the founder personally does, and whether someone else could run it.
Raising money vs selling
An investor mostly checks the cap table, the legal entity, the metrics, and any existing SAFE or note terms. A buyer in an acquisition checks the quality of earnings far more deeply, since they are paying for the cash flow. See SDE for how add-backs get tested.
How to prepare
- Build a data room in folders (financials, customers, product, legal, operations) with clear file names.
- Reconcile your numbers across systems before anyone asks. Differences between Stripe, your accounting and your dashboard cause the most friction.
- Fix contractor IP assignments and customer paperwork early.
- Disclose problems yourself. Surprises found later cost more than ones you flag.
Jason Cohen of A Smart Bear has described building his company with a sale in mind; the Mixergy interview covers how he prepared. Expect the process to take weeks to months. This is general information, not legal advice.
Related terms
- Term sheet
- Cap table (capitalization table)
- Earnout
- Customer concentration
- Exit strategy
- SDE (Seller's discretionary earnings)