Can anyone help with Software and SaaS?

February 05, 2026

by a searcher in Milwaukee, WI, USA

Hello everyone! I am currently focused on construction materials software. I am already deep into customer discovery calls with Quality control managers and have a specific target in mind. For those who've acquired vertical Software and SaaS businesses, how did you think about customer concentration risk and switching costs when evaluating the deal? Anything else I should be considering specifically for Software business? Looking forward to everyone's responses.

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Reply by a searcher
from Northwestern University in Toronto, ON, Canada

For switching costs, I would evaluate the following: - Software implementation time and cost - do they get new users up and running in a matter of hours/days, or do you have to upload a ton of historical information which takes months? - How mission critical is the software to the clients business? Is it a system of record or just a bolt-on product? - How customizeable/configurable is the software? Customization creates a moat, but lower scalability - How integrated is the software with the customers internal software stack? Does it integrate with an ERP, CRM, payment gateway, etc? - How many / what % of employees use the software regularly? - Look at the contracts, what are the contract term lengths, early termination fees, any auto-renewals? You'll want to dig into the customer level data pretty deeply and get gross and net dollar and logo retention numbers, avg customer term length, etc. More importantly how they are trending over time and on a customer segment basis, to see if the qualitative data matches whats happening in real terms. Concentration risk is tough to assess and mitigate. I would see if their largest clients have service level agreements, and if there are any breaches of the SLA to gauge performance. I would also look at usage data for those large clients to see if they are trending in the right/wrong direction. Are these large clients increasing or decreasing user licenses over time? Do the large clients have any custom work that would make switching harder? I'd also double click on recently churned clients, try to find out the reasons for those customer leaving. Is it due to pricing, or are there any product or service level gaps? Cross reference this with the current product roadmap, and a competitive product analysis to see how vulnerable you are to clients churning. From a structuring perspective, we've used an earn-out provision tied to the retention of key clients to mitigate against some client concentration.

Reply by an investor
from Harvard University in Santa Fe, NM, USA

Keep in mind that the incremental margins on SaaS revenue can be 90% plus. That is great if you're adding customers, but if you have a concentration issue and you lose one or two large customers, that loss goes straight to the bottom line. You need to look at scenario analysis where you lose a couple of big customers and what that does to the earnings/ cash flow profile.

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