In a SaaS business, which metrics are most important for due diligence, and how should you treat ARR versus revenue recognition?

• A. ARR, churn, net revenue retention, CAC, LTV, gross margins; address ARR growth vs recognized revenue and cash flow implications of deferred revenue
• B. Only quarterly revenue
• C. Inventory turnover
• D. Capex intensity

Answer: (A)

In SaaS due diligence, you evaluate the health of recurring revenue and the economics of getting and keeping customers. The strongest set of metrics centers on annual recurring revenue and how that base behaves, along with indicators of retention, expansion, and unit economics. ARR provides a clear, forward-looking revenue baseline that can be scaled with the business. Churn shows how much of that base is lost, while net revenue retention captures revenue growth from existing customers through upsells or cross-sells, signaling whether the product is driving more value within the current base. Coupled with CAC and lifetime value, you can assess whether acquiring customers is profitable over their entire relationship, and gross margins reveal the profitability of delivering the service itself. Taken together, these metrics give a holistic view of sustainability, growth potential, and profitability.

Treat ARR separately from revenue recognition. ARR reflects contracted, recurring revenue expected to recur each year and is a useful proxy for scale, but it is not the same as the revenue recognized in a given period. Revenue recognition under GAAP (such as ASC 606) records revenue as performance obligations are satisfied, which can be spread over time even if cash receipts occur upfront. Deferred revenue arises when customers prepay or when contract structures push revenue into future periods. This means ARR can rise even when reported quarterly revenue and cash flow don’t move in lockstep, so due diligence must connect ARR growth to how revenue is recognized and to resulting cash flow and liquidity.

The other options miss essential SaaS dynamics: focusing only on quarterly revenue ignores churn and unit economics; inventory turnover is irrelevant for a software service; capex intensity is not the primary driver of value in a recurring-model business.