SaaS businesses can look particularly attractive to acquisition buyers. They often have recurring revenue, gross margins around 85%, no physical inventory, and relatively low overhead.
Compared to acquiring a distribution business with $900,000 tied up in inventory, a SaaS acquisition may seem much simpler to finance.
But SaaS businesses present their own underwriting challenges.
Lenders need to understand how reliable the recurring revenue really is, whether customers are likely to stay, and how dependent the business is on its founder or third-party technology.
They'll also want to review customer retention, contracts, intellectual property ownership, and the systems the product relies on.
These requirements can catch buyers off guard, particularly when they haven't prepared the necessary documentation before submitting the deal.
Why SaaS Businesses Present Collateral Challenges
Traditional businesses often have physical assets that lenders can use as collateral.
For example, a $3 million HVAC acquisition might include vehicles, equipment, tools, and accounts receivable.
A $3 million SaaS acquisition, on the other hand, may consist primarily of software, customer relationships, and recurring subscription revenue.
While these assets can generate substantial income, they generally have limited liquidation value from a lender's perspective.
As a result, SaaS acquisitions are largely financed based on cash flow, with a significant portion of the purchase price often allocated to goodwill.
Under the SBA 7(a) program, insufficient collateral doesn't automatically disqualify an acquisition.
However, lenders are required to take available equity in personal real estate owned by individuals with at least 20% ownership who are also guarantors.
If you own a home with meaningful equity, you should be prepared for the possibility of a lien.
SBA loans also require unlimited personal guarantees from qualifying owners.
Because SaaS acquisitions often have limited physical collateral, lenders pay particularly close attention to the buyer's personal financial position and the business's ability to cover debt payments.
SBA lenders generally look for a debt service coverage ratio (DSCR) of at least 1.15x after accounting for the owner's compensation, while many credit committees prefer approximately 1.25x for acquisition financing.
When there's little collateral available, strong and consistent cash flow becomes even more important.
How Lenders Evaluate SaaS Revenue
One of the biggest differences between SaaS underwriting and other acquisition financing is how lenders assess revenue quality.
For many traditional businesses, lenders focus on verifying historical sales and profitability.
With SaaS, they also need to determine how much of that revenue is likely to continue after the acquisition.
There are four areas they typically examine.
1. Contracted ARR vs. Annualized Revenue
Annual recurring revenue (ARR) is one of the most important metrics in a SaaS acquisition, but buyers need to understand how the seller calculated it.
A business advertising $2.4 million in ARR may have simply taken a strong month of revenue and multiplied it by 12.
For example, if March generated $200,000 because two enterprise customers signed up and one made an annual prepayment, annualizing that month may overstate the business's actual recurring revenue.
Lenders want to see contracted ARR based on active customer subscriptions and their committed pricing.
They'll also want those figures reconciled against the billing platform and the business's tax returns.
2. Gross Revenue Retention vs. Net Revenue Retention
Net revenue retention (NRR) measures how revenue from existing customers changes after accounting for expansion, downgrades, and cancellations.
A business can report NRR above 100% while still losing a meaningful number of customers.
For example, increased spending from a handful of larger customers may offset revenue lost from smaller customers who cancel their subscriptions.
That's why lenders also review gross revenue retention (GRR).
GRR measures how much recurring revenue the business retains from existing customers without including expansion revenue.
It provides a clearer picture of how much revenue is likely to continue without relying on additional sales.
For small and midsize business SaaS companies, GRR below approximately 85% can raise concerns about whether historical cash flow is sustainable.
3. Customer Churn vs. Revenue Churn
Lenders also look at both customer churn and revenue churn.
A SaaS business could lose 20% of its customers in a year while maintaining relatively stable revenue if most departing customers were paying only $40 per month.
That may not be a major financial problem on its own.
However, it could also mean the business depends heavily on a small number of high-value customers.
Reviewing customer churn alongside revenue churn helps lenders understand where the business's revenue is concentrated and how customer losses may affect future performance.
4. Customer Contract Terms
Not all recurring revenue provides the same level of predictability.
A business with annual contracts, automatic renewals, and clearly defined cancellation notice periods generally has more visibility into future revenue than one operating primarily through month-to-month subscriptions.
For example, if 90% of customers are on month-to-month agreements, a substantial portion of revenue could theoretically disappear within a few months.
Lenders account for that risk when evaluating cash flow and determining an appropriate coverage cushion.
Buyers should request a customer contract schedule showing the breakdown between monthly and annual agreements, renewal provisions, and notice requirements.
Customer Concentration and Its Impact on Financing
Customer concentration is another major consideration in SaaS acquisitions.
A business may report consistent revenue and strong margins but still depend heavily on a few customers.
As a general underwriting guideline:
- One customer representing more than 20% of revenue: Lenders will typically want additional explanation.
- More than 30%: The concentration may begin affecting the financing structure.
- More than 40%: Lenders may require additional seller financing on standby, a lower loan advance, or another arrangement to address the risk.
These thresholds aren't necessarily automatic disqualifiers. The nature of the customer relationship matters.
For example, a customer representing 28% of revenue may be less concerning if they've worked with the business for 10 years and recently renewed a three-year contract.
That same concentration could be much riskier if the customer signed up only nine months ago and has no long-term agreement.
During due diligence, buyers should review:
- Length of each major customer relationship
- Contract expiration dates
- Renewal history
- The customer's financial stability
- Whether the relationship depends on a particular individual or a broader company agreement
Channel concentration is also worth examining.
If 60% of new customers come through one integration marketplace or referral partner, the business may face significant risk even if revenue is diversified across individual customers.
Why Deferred Revenue Matters at Closing
Deferred revenue can have a major impact on the working capital required for a SaaS acquisition.
When a customer pays annually in advance, the business receives the cash before delivering the full service.
For example, a customer who pays for a 12-month subscription in November has prepaid for service that must continue through the following October.
If the business is sold during that period, the new owner generally assumes responsibility for delivering the remaining service.
That obligation appears as deferred revenue on the balance sheet.
The issue arises when the seller retains the prepaid cash while the buyer takes over the remaining service obligation.
Suppose the business has $340,000 in deferred subscription revenue at closing.
If the buyer inherits those obligations without receiving sufficient working capital, they may need to fund the cost of providing that service from their own cash reserves.
Lenders will generally want to see how those obligations are being addressed in the transaction.
That may involve funding the deferred revenue balance at closing or including additional working capital in the acquisition financing.
Buyers should negotiate the treatment of deferred revenue before signing the LOI.
Important considerations include:
- Whether deferred revenue is included as a current liability in the working capital calculation
- The target working capital amount, ideally based on a trailing 12-month average rather than a single balance sheet date
- How any working capital adjustment will be calculated and settled after closing
Our deal structuring guide explains how to address these items during acquisition negotiations.
Managing Founder Dependence in SaaS Acquisitions
Many SaaS businesses valued below $5 million still rely heavily on their founders.
In some cases, the founder built the product, manages its technical architecture, and handles the most complicated customer support issues.
That creates a significant transition risk.
If the founder leaves immediately after closing, the buyer may lose the person with the most knowledge of how the product works.
SBA guidelines also limit how long a seller can remain involved after a complete change of ownership, which can make extended technical transitions difficult.
Buyers should have a clear plan for replacing or transferring the founder's responsibilities.
Options may include:
- Hiring or retaining a senior engineer before closing
- Establishing a documented knowledge-transfer period within the permitted transition window
- Structuring part of the purchase price as a seller note on standby so the seller maintains a financial interest in a successful transition
Lenders will generally be more comfortable with a specific transition plan than a general assurance that the software is well documented.
Identifying the engineer who will take responsibility, establishing a start date, and including their compensation in the financial projections can help address these concerns during underwriting.
Reviewing Software Ownership and Third-Party Dependencies
In a SaaS acquisition, the software itself is often the business's most important asset.
Buyers need to confirm that the company owns the necessary intellectual property and has the legal rights to continue operating the product after closing.
Three areas deserve particular attention.
1. Intellectual Property Assignments
Every employee or contractor who contributed to the codebase should have appropriate intellectual property assignment agreements.
This is especially important when previous developers were hired informally or through offshore contracting arrangements.
If a contractor never assigned ownership of their work to the company, the buyer may face questions about whether the business fully owns the software it's selling.
Missing assignments can create legal problems involving the company's primary asset.
2. Open-Source Software Licenses
Many SaaS products rely on open-source software.
While that's common, certain licenses carry obligations that may affect how the software can be distributed or used commercially.
Buyers should have qualified counsel review open-source licenses and identify any restrictions that could affect the business model.
The cost of a license review is generally small compared with the potential consequences of discovering an issue after closing.
3. Third-Party Technology Dependencies
Some SaaS businesses depend heavily on another company's platform, API, or integration.
If the underlying provider changes its pricing, restricts access, or discontinues a service, the SaaS business may face significant operational challenges.
During due diligence, review:
- Third-party terms of service
- Historical pricing changes
- Contractual protections, if any
- Alternative providers or technical workarounds
A business that depends entirely on one external platform may have more operating risk than its financial statements suggest.
What Lenders Want to See in a SaaS Loan Package
A well-prepared SaaS acquisition package should give the lender a clear understanding of revenue quality, customer retention, operating costs, and transition risks.
The most important items generally include:
- Contracted ARR: Reconciled against billing records and tax returns.
- Gross and net revenue retention: Broken down by customer cohort.
- Customer churn: Including both customer counts and revenue lost.
- Average contract value and contract terms: Showing the mix of monthly and annual agreements.
- Top-five customer concentration: Identifying how much revenue depends on the largest customers.
- Gross margin: After accounting for hosting and customer support expenses.
- Deferred revenue: Showing outstanding prepaid subscription obligations.
- Seller dependence: Explaining which responsibilities the founder handles and how they'll be transferred.
Organizing these items before submitting the acquisition can reduce the number of follow-up requests during underwriting.
Buyers should also reconcile the information with the business's filed tax returns rather than relying exclusively on the figures presented in the Confidential Information Memorandum (CIM).
Our deal affordability calculator can help you evaluate whether the business's cash flow supports the proposed acquisition financing.
Choosing the Right Financing Program
SBA 7(a) is often an attractive financing option for owner-operators acquiring SaaS businesses.
The program generally offers favorable leverage and borrowing costs compared with the other financing options discussed here.
Key terms include:
- Maximum loan amount: $5 million
- Minimum equity injection: 10% of total project costs
- Interest rate: Generally based on the Wall Street Journal Prime Rate plus a negotiated lender spread
- Typical acquisition loan term: 10 years, fully amortizing, without a balloon payment
Because SaaS acquisitions frequently involve substantial goodwill, the standard 10-year amortization generally applies.
However, not every acquisition fits SBA eligibility or financing requirements.
For larger transactions or deals involving more complex structures, alternative financing may be appropriate.
Our FLEX program offers financing up to $10 million and can accommodate transactions involving:
- Buyers who hold green cards
- Rollover equity
- Multiple business entities
- Closing timelines that may be too short for traditional SBA financing
For larger SaaS acquisitions, our Capital Access program provides institutional financing from $10 million to $250 million, with different lending terms and covenant requirements.
Selecting the appropriate program early can prevent unnecessary delays.
A transaction that doesn't meet SBA eligibility requirements is unlikely to become eligible simply by spending additional time in underwriting.
What Buyers Should Do Before Signing an LOI
Before submitting an offer on a SaaS business, request four important documents:
- Contracted ARR schedule by customer. Verify the recurring revenue associated with each active customer and their contract terms.
- Monthly customer cohort retention data for the past 24 months. Review how well the business retains both customers and revenue over time.
- Deferred revenue balances for the trailing 12 months. Understand how much prepaid revenue may transfer as an obligation at closing.
- Employee and contractor intellectual property assignments. Confirm the business has appropriate ownership rights to its software.
These documents can help identify potential financing and operational concerns before you commit to the transaction.
If the seller cannot provide them, that's something you'll want to understand before moving forward.
The next step is determining how much financing the business can support and which lending program is appropriate.
If you're evaluating a SaaS acquisition, get prequalified.
Our team can review the business, assess its financial structure, and help identify the right lender and financing program before you sign an LOI.