5 Questions Every Investment Banker Will Ask

As they assess the transaction readiness of your SaaS business

When it comes time for a SaaS business to raise institutional funds, or evaluate M&A options, it seems logical to engage with an investment banking firm. More specifically, one of the elite, tech-only boutique firms that lives and breathes software transactions. They know what to do, right? They absolutely do, but they’re approached by hundreds of companies each year and themselves must be selective with which they take to market.

One of the things bankers will begin instantly assessing is: Just how serious, ready, and in tune with your own company are you?  In considering potential transactions, every sell-side advisor will, in one way or another, ask five questions that growth-stage SaaS executive team should be ready to answer:

1. Have you taken the basic steps with your financials? Every investment banker needs to know exactly where your finance and accounting stands. Some of the most basic steps include a migration to accrual-based accounting and mapping all operational transactions to a proper chart of accounts. There will also be some discussion about the bookkeeping to establish how up to date “total money in” and “total money out” are and identify potential issues with backward looking financial statements.
2. How clean is your data? This is where things can get a little trickier. Growth-stage companies, after all, tend to quickly implement platforms and solutions to support their growth, each of which spits out its own data. What a banker is really trying to assess here is what it’s going to take to avoid a “garbage in, garbage out” scenario with your financial models. Proper revenue recognition, separation of MRR vs. non-MRR, and invoice matching are just a few examples of where data can get messy, resulting in unreliable modeling.
3. Is your financial model telling a cohesive, coherent story? In the world of corporate finance, investments, and transactions, models are not just numbers in a spreadsheet, they are a means of storytelling. And, just like you need an enticing narrative about your products, your financial model has to paint a compelling picture of your business. With a set of semi-educated guesses based on previous years’ messy data, that won’t happen. Not only will the right model provide a more accurate picture of your business trajectory, it will give confidence that you are making well-informed operational decisions (decisions worth investing in!). A good model will not only make it easier to summarize “what’s going on” but also see trends and address anomalies.
4. Are you tracking the right metrics and KPIs for a SaaS business? When investment bankers take a company to market, it needs to be compelling on its own and relative to others. They must be able to see that you’re looking at your own company through a SaaS financial lens. Therefore, it is important to track trends in MRR & churn, segment customers, and conduct cohort analysis. Otherwise, there’s no way to develop vital analytics tools, like an ARR bridge that logically connects the historical to the projected. Only with those tools can an investor or acquirer assess your SaaS company relative to others. In fact, it will be nearly impossible to take to market without them.
5. How well do you truly understand your business through the lens of its financials? The investment banker’s job is to bring your company to market, crafting the right narrative putting it in front of those with the strongest interest and greatest willingness to pay. But at the end of the day, most investors or acquirers are going to want to test how well executive teams know their own businesses. With that in mind, it will be important for your banker to know whether you can actually narrate the company story (including any anomalies), and answer any questions, in sophisticated financial terms.

Key takeaways

A common initial reaction to these questions is: “Well, I thought bankers were supposed to do that.” While they can certainly help, it’s very important that they know just how serious, and well prepared, you are for a transaction. At the end of the day, a banker’s job is to engineer the transaction, not serve as your FP&A department. And the more transaction-ready you are, the easier it will be for them to do their jobs well.

Transactions notwithstanding, there’s no substitute for having unimpeachable financial data, a model that can reasonably predict the future, and the ability to speak to them. Not only will it make it far easier for an investment banker to get you in front of the right people, it will dramatically improve the valuation by reducing the massive amount of uncertainty inherent in messy financials.

What now?

Have you spent years preparing your financials properly and the above is merely confirmation? Awesome! There is likely a smooth transaction in your future. But if your answers are a little tenuous (or perhaps all include some variation of “I’ll get back to you on that”) don’t worry, there’s help available. At KPI Sense, all we do is strategic FP&A for growth-stage SaaS companies. Whether a transaction is imminent or you’re planning way ahead, we’ll gladly offer a free assessment and proof-of-value to demonstrate just how much more impactful your financials can be for both operational decision-making and game-changing transactions alike.

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