Beyond historical financial performance, PE underwriting incorporates forward-looking assumptions on revenue growth, margin expansion, capital requirements, and potential exit valuation.

Key Areas of Investor Evaluation

• Revenue Quality: ARR, recurring revenue mix, contract terms, and customer concentration.

• Retention: Gross and net revenue retention, cohort performance, and churn drivers.

• Pricing: Historical increases, discounting, willingness to pay, and expansion opportunities.

• Profitability: EBITDA margins, free cash flow, and operating leverage.

• Sales Efficiency: Customer acquisition cost, payback periods, and lifetime value.

• Technology: Technical debt, development productivity, infrastructure costs, and cybersecurity.

• Management: Organizational efficiency, leadership capabilities, and execution capacity.

• M&A Opportunities: Acquisition pipeline, integration requirements, and achievable synergies.

1. The PE Investment Thesis: Assessing Acquisition Opportunities

• Recurring Revenue and Cash Flow Visibility: Buyers assess ARR, recurring revenue mix, contract duration, renewal terms, and customer concentration to evaluate revenue predictability and debt-financing capacity.

• Customer Retention and Revenue Expansion: GRR and NRR measure revenue stability and expansion potential. Strong retention reduces reliance on new customer acquisition, while upselling and cross-selling support growth.

• Growth Potential: Buyers evaluate customer acquisition, geographic expansion, cross-selling, and product extensions against the investment required to achieve growth.

• Profitability and Cash Conversion: EBITDA margins, free cash flow, capitalized development costs, and working capital requirements indicate the capacity to service debt, reinvest, and fund acquisitions.

• Competitive Positioning and Switching Costs: Product differentiation, workflow integration, customer dependence, and competitive alternatives influence revenue durability and customer switching risk.

• Platform and Add-On Acquisition Potential: Buyers assess the company’s suitability as a standalone platform or add-on acquisition, including consolidation opportunities, distribution expansion, and operating synergies.

2. Buyer Due Diligence: Underwriting Financial and Operating Performance

• Revenue Quality and Cohort Performance: Buyers assess ARR reconciliation, recurring revenue mix, customer concentration, cancellations, and cohort performance to distinguish retention-driven growth from growth dependent on customer replacement.

• Pricing and Monetization: Investors evaluate subscription tiers, historical pricing, discounts, renewal increases, and willingness to pay to identify revenue expansion opportunities without materially increasing churn.

• Customer Acquisition Economics: CAC, LTV, payback periods, sales productivity, and acquisition channels help buyers assess the scalability and efficiency of customer growth.

• Operating Expense Structure: Buyers evaluate engineering, product development, sales, marketing, and administrative costs to identify operating leverage and sustainable efficiencies without compromising product quality or customer service.

• Technology and Product Infrastructure: Technical debt, cybersecurity, cloud costs, infrastructure, development productivity, and third-party dependencies inform future investment needs and integration risks.

• Management and Organizational Capabilities: Buyers assess leadership depth, succession planning, founder dependence, and management’s ability to execute growth and operational improvements.

• Financial Quality of Earnings: Revenue recognition, deferred revenue, EBITDA adjustments, capitalized R&D, and cash conversion help establish sustainable earnings and support the company’s valuation basis.

Due diligence findings can directly influence purchase price, financing terms, required seller protections, and transaction certainty.

3. Post-Acquisition Value Creation: How PE Buyers Seek to Improve Returns

Pricing and Revenue Optimization

• Subscription Pricing: Buyers assess pricing relative to customer value and competition to identify revenue growth opportunities while managing potential churn.

• Product Packaging and Monetization: Subscription restructuring, usage-based pricing, and monetization of free features can increase revenue per customer, depending on willingness to pay.

• Customer Expansion: Upselling, cross-selling, and product extensions can increase revenue from existing customers and reduce reliance on new customer acquisition.

Operating Example — Evernote’s Pricing Strategy

Following Bending Spoons’ acquisition, Evernote increased subscription prices in 2023. In an interview with The Twenty Minute VC (20VC), Bending Spoons product leader Federico Simeonato estimated the increase at approximately 50–60%.

The company anticipated some customer attrition but considered the pricing change supportable based on the utility provided to its subscriber base.

As Simeonato explained:

“It all boils down to how useful the product is for you.”

The example illustrates how a software acquirer can assess pricing opportunities against customer retention and perceived product value. The interview does not establish the financial returns generated by the pricing initiative.

Bending Spoons operates shared corporate and technology infrastructure across its software portfolio.

Simeonato described the organizational structure as:

“A horizontal platform to which we plug individual products.”

The company centralizes certain support functions while retaining dedicated teams responsible for product development, monetization, and growth.

During the interview, Simeonato stated that Evernote’s business unit had declined from several hundred employees to fewer than 100.

For PE buyers, the relevant consideration is whether operating efficiencies are achievable without undermining product performance, revenue retention, or future growth.

Customer Retention and Product Investment

Operating Example — Evernote’s Retention Strategy

During the 20VC interview, Simeonato identified subscriber retention as Evernote’s most important product success metric.

This approach illustrates the relationship between product utility and recurring revenue durability. Improving retention can create economic value even when the immediate revenue impact of a specific feature is limited.

Buy-and-Build Expansion

Buy-and-build strategies can accelerate scale through complementary acquisitions, distribution expansion, and operating synergies. However, the economic benefit depends on acquisition pricing, integration costs, and the sustainable earnings contribution of each acquired company.

4. Selling to Private Equity: Considerations for CEOs, CFOs, and Founders

A company preparing for a PE transaction should evaluate its business through the same financial and operating framework used by prospective investors.

Beyond preparing diligence materials, sellers should consider how the buyer’s investment thesis influences the economics and structure of a proposed transaction.

Understanding How Buyer Underwriting Affects Sale Outcomes

• Valuation and Future Upside: Assessment of revenue growth, margin expansion, and allocation of future value between buyer and seller.

• Buyer Selection: Evaluation of financial sponsors, platform investors, and strategic acquirers based on investment strategy and synergy potential.

• Quality of Financial Information: Reliable ARR, retention, profitability, and cash flow reporting to support valuation and reduce diligence uncertainty.

• Management Continuity and Incentives: Post-closing responsibilities, management autonomy, incentive plans, and performance requirements.

• Transaction Structure: Cash consideration, rollover equity, earnouts, deferred payments, and liquidity at closing.

• Rollover Equity and Future Participation: Exposure to future equity returns, leverage, dilution, governance restrictions, and exit risk.

• Execution and Integration Risk: Buyer track record, integration capabilities, financing certainty, and planned operational changes.

• Pre-Sale Preparation: Financial reporting, customer concentration, pricing practices, technology risks, and management dependencies.

5. Conclusion

Ultimately, the value realized in a sale depends not only on the buyer’s expected post-acquisition improvements, but also on how that potential upside is reflected in the purchase price and transaction structure.

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_Source

1. _{McKinsey & Company. Five Considerations for Software Private Equity in 2024. March 1, 2024. Analysis of software investment opportunities, go-to-market effectiveness, pricing, R&D productivity, and M&A value creation.
   https://www.mckinsey.com/industries/private-capital/our-insights/five-considerations-for-software-private-equity-in-2024}

2. _{McKinsey & Company. Pricing: The Next Frontier of Value Creation in Private Equity. October 23, 2019. Research on pricing improvement opportunities in acquisition diligence and portfolio operations.
   https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/pricing-the-next-frontier-of-value-creation-in-private-equity}

3. _{Bain & Company. Global Private Equity Report 2025. Research on software acquisition returns, margin improvement, and the importance of integrated commercial, technical, and operational due diligence.
   https://www.bain.com/insights/topics/global-private-equity-report/}

4. _{The Twenty Minute VC (20VC). Harry Stebbings, interview with Federico Simionato, Bending Spoons product leader}

_{Research note: The private equity investment framework reflects general industry practices and may vary by investment strategy, software subsector, company size, and transaction structure. Bending Spoons is presented as a software acquisition and operating example, not as a representative}