Due Diligence Deep Dive <<Pt.1>>
Highlighting key performance metrics for SaaS Co's
Happy Friday Founders & Friends!
Let’s get into it 🚀
Due diligence deep dive (Part 1); SaaS performance metrics 📈
From ARR to churn to LTV, there are hundreds of different performance metrics that PE investors can look at while evaluating a software business. In this week’s newsletter, we are going to break down a couple key metrics that the Bloom team looks at during the due diligence process.
The rule of 40 (the battle of growth v.s. profitability)
The rule of 40 is one of the most common metrics used by both strategic and financial acquirers who want to get an insight into the health & performance of a SaaS co. This rule maintains that a healthy and well-performing SaaS co’s growth rate + profit margin should add up to 40% +.
Rule of 40 = Revenue Growth % + EBITDA Margin %
Although revenue growth and EBITDA margin are the two most widely used metrics to gauge a companies profitability and growth, what makes this figure so complicated is the lack of a standard measure for profitability. For example, some may choose to use net income instead of EBITDA.
One downside- Although it is a great metric to use from a buyer’s perspective it does give limited insight to management on the ways to optimize for growth and profitability.
Net dollar retention (The ultimate measure of customer stickiness)
Net dollar retention (NDR) is essential for understanding the strength of your product. NDR can be measured on an annual or monthly basis and is a great measure of the % at which the existing customer base grows or shrinks each year or month.
The formula that the Bloom team uses to calculate NDR:
((Starting ARR - ARR churned - ARR downgraded + ARR upgraded) / (Starting ARR)) X 100
**ARR can be interchanged with MRR**
To give a further understanding of this figure- if NDR is greater than 100% then growth from the existing customer base more than offsets any losses from that same customer base. That is a good sign!! 📈 Many software companies aim to have an NDR greater than 110-120%, which is a sign of a companies ability to upsell existing clients and increase contract value.
Hope you enjoyed this week’s insight into some key SaaS performance metrics. We will be back with part 2 of the Due Diligence Deep Dive next week!
Make sure to check out the following reads related to this topic 👇👇
📚 The M&A Metrics Software Companies Need to Know
📚 The Metrics that Matter for Growth Stage Startups in 2020
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