Most SaaS acquisitions overpay because buyers miss hidden churn. The seller's MRR looks healthy, but beneath the surface, revenue is decaying in ways that do not show up on a standard P&L. Here are the 7 red flags to check before you sign.
If 40% or more of total MRR comes from your top 3 accounts, one churn event destroys the valuation. This is the single most common oversight in SaaS acquisitions. Ask the seller for a customer-level revenue breakdown before you model anything.
80% of overpayment cases involve >30% revenue concentrationA customer who pays $199/month but has not logged in for 6 months is not recurring revenue — they are a cancellation waiting to happen. Ask for login data alongside billing data. If the seller refuses to share it, price the deal assuming those accounts churn within 90 days.
Annual contracts inflate current MRR and mask churn until renewal. If 60% of revenue is annual and the renewal rate is below 70%, half the business walks out the door in 12 months. Ask for annual renewal rates by cohort, not just an aggregate number.
Net revenue retention above 100% looks great — unless it is hiding negative logo retention. If the business is losing 15% of customers per year but expanding the remaining ones, you are buying a shrinking base with a temporary revenue bump.
A SaaS business offering 50% discounts to retain customers is buying time, not loyalty. When you acquire it, those discounts either disappear (triggering churn) or you eat the revenue hit. Ask for gross vs net MRR and the discount rate per cohort.
Overall 5% monthly churn can hide 20% churn in the enterprise tier and 2% in SMB. If the segment with the highest churn is also the segment with the highest ARPU, the business has a structural problem. Demand cohort-level churn rates by plan and customer size.
If average revenue per customer is shrinking quarter over quarter, the business is either discounting to retain or losing its highest-value customers. Either way, the trend points down. Ask for monthly ARPU trends broken out by original cohort.
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