Key Aspects of SAAS Revenue Recognition and M&A Due Diligence

Cloud-based software-as-a-service business models are enabling rapid growth in some of the most innovative software-service companies. As technology companies evolve to meet market needs, the accounting and financial services industry must also adapt to address investor needs for financial reporting, business valuation, M&A transaction due diligence, and dispute resolution.

Four of Stout’s service groups discussed the key aspects of SaaS revenue recognition. Steve Sahara, director in Stout’s disputes, compliance, and investigations practice, interviewed Jeremy Krasner, managing director in the valuation advisory practice; Brad Burch, managing director in the accounting and reporting advisory practice; Kevin Pierce, managing director in the disputes, compliance, and investigations practice; and Joe Randolph, managing director in the financial due diligence practice of the transaction advisory group.

“The SaaS model provides customers with many benefits, and it has been a strong performer for investors. Certain SaaS businesses, or at least those with high revenue, have historically delivered revenue growth in excess of 30% but with cash flow margins of negative 20%, as well as significant research and development and sales and marketing expenditures. Over the past five years or so, the higher-revenue-growth companies were rewarded with higher valuation multiples despite the negative cash flow,” says Jeremy Krasner, a managing director in the valuation advisory group at Stout and is the Tysons Corner office leader.