4 Questions To Help You With Shopify App Due Diligence

Shopify app acquisitions are booming these days. More and more aggregators are popping up to Acquire them. But are they always a good investment? SaaS businesses can be attractive acquisitions for many reasons, mostly because of their recurring revenue model. However, unexpected issues with a business are harder to spot if you don’t know where to look. 

If you’re new to buying a SaaS business or looking to refine your process based on the Shopify App niche, this post will dive into four simple questions to ask first. Think of them as a primer on the areas where unexpected issues might arise. Evaluating these areas should form part of your wider due diligence and will help you mitigate risk and earn a return on your investment. 

Not a buyer? If you own a SaaS business, this post will help you better understand how to make your business more attractive to potential buyers.

1. Is It Technically Sound?

A Shopify App is a software business, so you need to know that the software you’re acquiring is functional, reliable, and stable. Like the structure of an airplane, you want to ensure the tech is robust and efficient, and that no surprises lurk behind a line of sloppily-written code. 

Without proper due diligence on the technical aspects of a Shopify App, you invite disaster. Most technical disasters are preventable if someone qualified evaluates the code. That might be you, a friend, colleague, or someone you hire specifically to do it for you. 

You’ll need to review and understand if you can build and scale on the existing code. If not, you can be in for challenging times ahead. For example, a software business I’m familiar with was recently Acquired by a team that did not do good technical due diligence. 

The company was growing like crazy, but as it scaled, the product began to have problems. The Acquirer had to completely rebuild the product. This was very expensive and time-consuming.  Don’t be like that buyer. Instead, review the technical aspects of the product before you Acquire it. Think of it as insurance against your whole acquisition blowing up on you in the future. 

2. Do Customers Like the Product?

A good product usually survives while a poor one won’t. This goes for all types of businesses. Not familiar with the industry specifics here? That’s fine – let the numbers do the talking.

The first metric to examine is churn. Churn is usually expressed as the percentage of customers who cancel their subscription every month. For example, if you have 100 customers at the start of the month and 5 customers cancel, churn would be 5 percent. Churn is critical to SaaS due diligence since it indicates how much the customers like the product. 

If your customers like the product and are happy, they’ll tend to stick around and continue paying. If they’re dissatisfied, they’ll cancel their subscription. The higher the Shopify app’s churn, the faster the customers drop off, and the more you have to spend1 to Acquire new ones to continue growing revenue. 

Another metric that can reveal customer opinion about the product is the net promoter score (NPS), which asks customers how likely they are to recommend the product to a friend. NPS can also predict revenue growth through word-of-mouth referrals. 

Finally, consider the customer support tickets. How many tickets does the product get each day? If the volume is higher than the average, that can indicate that customers either don’t understand the product or it’s failing to work as expected.

Ideally, your acquisition target will have low churn, a high net promoter score, and lower than average customer service tickets. All signs that customers are happy with the product. If you can’t determine or make sense of these metrics alone, enlist the help of a competent due diligence provider that can help you make the right decision.

3. Are Financials Complete and Correct?

Small businesses may lack accountants, and businesses that are strong in product and marketing might pay less attention to the financials. Before acquiring a Shopify app, establish that the financials are both complete (no missing data) and correct (no errors). 

You might want to rebuild the founder’s P&L (profit and loss) statement from scratch. During due diligence, you’ll get access to all of the business’s tools and back-end software, so you can take their inputs to create your own P&L. Then compare yours with the founder’s to identify any discrepancies. We follow this process at Centurica, and though it’s a lot of work, we find it most effective at uncovering any discrepancies.

Most founders aren’t intentionally misleading but make mistakes because accounting isn’t their strong suit. Once you’ve verified the P&L, consider the customer acquisition cost (CAC) and customer lifetime value (CLTV). Ensure that CLTV is higher than CAC or you’ll struggle to achieve profitability. 

One of the good things about Shopify Apps is that you can benefit from visibility in the Shopify App marketplace. This can greatly reduce CAC.

4. Is the App Visible on the Marketplace?

One of the most appealing aspects of Shopify apps is visibility in the App Store, putting your app in front of your target audience for free. You don’t need to pay for advertising, which is also why Shopify apps are becoming so popular in roll-ups. 

What leads to positive marketplace effects? In short, it comes down to ranking well for your target keywords. For example, let’s say the app you’re targeting is a tool that allows you to add a beautiful blog to your Shopify store. You’ll want to see if the app is showing up for the most relevant keywords such as “add a blog”, “blog plugin”, “blog”, and so on. 

Reviews also help your Shopify app rank in the App Store (quantity, quality, and velocity). Due diligence should verify that the founder isn’t participating in review manipulation, which can get your app permanently banned. 

If you’re uncomfortable or inexperienced with diving into keywords to uncover opportunities and threats, hire a trusted provider with experience. Ranking in the Shopify App Store will help you grow the business, but it also presents risks, and a trusted expert can help you navigate the process.

To Buy or Not to Buy? 

Only you can decide whether a Shopify app is the right acquisition for you. Trust your instincts, stick to your goals, and always conduct thorough due diligence to mitigate risk. As a recap, here are the four areas and relevant questions to review when doing due diligence on a Shopify app.

Is the business technically sound? 

  • Quality, reliable code
  • Fit for purpose
  • Low maintenance

Do customers like the product?

  • Lower than average churn
  • Low volume of customer support tickets
  • High NPS score 

Are financials complete and correct?

  • Complete and correct data
  • No accounting discrepancies
  • CLTV higher than CAC

Is the app visible on the marketplace?

  • Ranks highly on the Shopify App Store
  • Ranks for relevant keywords
  • High volume of legitimate top-scoring reviews

These questions barely scratch the surface of due diligence but give you a solid foundation to start de-risking your acquisition. If you have any doubts or uncertainties about a target, it may not be the right business to Acquire. Or maybe you need to talk to the owner to discuss a change in pricing. 

If you need help with due diligence on your Shopify App or any acquisition, reach out to our team at Centurica. Our analysts have expertise in all online business models and are happy to support you in achieving your acquisition goals.  

References

1https://hbr.org/2014/10/the-value-of-keeping-the-right-customers\


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