Answers / Financial Due Diligence
How do you analyze revenue quality for a SaaS company?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Key metrics: ARR (Annual Recurring Revenue), MRR, churn rate (gross and net), expansion revenue, customer lifetime value, CAC payback period. Decompose MRR movement: beginning MRR + new + expansion – churn – contraction = ending MRR. Check revenue recognition (ASC 606/IFRS 15): is professional services revenue separated from license revenue? Analyze cohort retention curves.
WHAT INTERVIEWERS LISTEN FOR
- ✓Focus on recurring revenue metrics like ARR and MRR
- ✓Decompose MRR changes into new, expansion, churn, and contraction
- ✓Evaluate churn rates and cohort retention curves
- ✓Check revenue recognition treatment under ASC 606/IFRS 15
- ✓Assess unit economics: LTV, CAC payback period
COMMON MISTAKES
- ✗Ignoring professional services revenue separation
- ✗Focusing on total revenue growth without recurring revenue breakdown
- ✗Overlooking cohort analysis and retention trends
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