Don't Buy a SaaS Startup Without Checking These 3 Things

Buying a software-as-a-service (SaaS) business can feel like a huge opportunity, but every investment carries risk. Going in blind is like flipping a coin and hoping for the best. But if you do your homework, you can confidently pick a winner and plant the seeds for incredible growth instead of just pouring your money down the drain. This is how smart operators approach in a .

Before you even think about making an offer, there are three critical areas you need to dig into. Get these right, and you'll be in a great position to acquire a truly valuable asset.

1. The Numbers: Churn, LTV, and CAC

First up, you have to understand the numbers, and the most important one is churn. Churn is basically the percentage of revenue a business loses over a period. This might happen because customers cancel their service, but it can also happen if they downgrade their plans or remove add-ons. It's a direct measure of customer loyalty and product quality, so a low churn rate is the first green flag you should look for.

Of course, the goal is always negative churn, where you’re actually gaining more revenue than you’re losing. But context matters. For example, you should expect higher churn when dealing with small to medium-sized businesses (SMBs) because it’s just easier and cheaper for them to switch to a competitor. The key is to compare your target business’s churn rate to others of a similar size in the same industry. If it’s consistently beating the competition, you might have found a gem.

Two other numbers to analyze are the Lifetime Value of a customer (LTV) and the Customer Acquisition Cost (CAC). LTV tells you the total income you can expect from a single customer over time, including their subscription, upsells, and any other revenue. A high LTV can help offset losses and shows you which customers provide the best return. On the other hand, CAC should almost always be low. It’s easy to burn through cash on marketing, but if you’re spending a lot to acquire customers who don’t stick around (high CAC, high churn, low LTV), you've got a serious problem. Always look at churn, LTV, and CAC together to see the real story behind the business.

2. The Code: Who Built It and Does It Work?

The next area to investigate is the software itself. If you're not an engineer, this is the time to hire one or ask a technically savvy friend for help. At a minimum, you need to understand how the product works from a high-level perspective. A well-organized, modern codebase is usually a sign of a strong development team.

Just as important is figuring out who owns the intellectual property (IP). The current team might own it, but it’s possible that contractors or outside vendors have a claim too. While having multiple owners isn’t a dealbreaker, it does make things more complicated. To avoid major headaches down the road—especially when the business starts to scale—you need to make sure there are solid contracts that clarify everyone’s ownership stake. This is a non-negotiable step when evaluating any .

3. The Customers: Your Ultimate Source of Truth

Finally, you need to listen to what customers are saying. A company's attitude toward its customers can make up for a lot of other shortcomings. If the product is still in its early stages, fantastic 24/7 support can keep people happy while they wait for improvements. For more established businesses, a great customer experience reduces churn and generates positive reviews and referrals, which naturally lowers your acquisition costs. This is what separates the from the ones that fizzle out.

Customer feedback often uncovers problems that you won’t find on a spreadsheet—issues that even the founders might not be aware of. A huge backlog of support tickets or a total breakdown in communication could mean you’re about to buy a business on the verge of collapse. Before buying, read every review and testimonial you can find. Reach out to current customers, and most importantly, use the product yourself. See how the company has handled problems in the past and check what people are saying on social media. If you see good news or at least positive resolutions to tough situations, you know the business has put its customers first, making it one of those with real potential.

Whether you’re a first-time buyer or a seasoned entrepreneur, the SaaS market is full of opportunities. Turning a find into a is a common goal. But if you focus on the wrong things, you could be making a costly mistake. So, take the time to do your homework on these three areas, and you can be confident that your next acquisition is a profitable one.