Introduction
Sell-side technical due diligence is an assessment that helps a seller (e.g., a strategic, venture capital, growth, or private equity company) or a target of M&A prepare themselves for a sale or a significant capital event. It helps surface issues before buy-side diligence, allowing the seller to understand concerns and give time to rectify them before a buyer gets involved. The result is a much more streamlined process for the buyer with fewer surprises. For the seller, they benefit from better readiness, a less painful diligence process, and a higher or fair deal valuation. Sell-side technical due diligence can help eliminate potential deal killers, saving everyone valuable time and costs.
In the world of private equity, making informed investment decisions is crucial for success. While financial and legal due diligence are commonly conducted, sell-side technical due diligence can be overlooked. Thoroughly assessing a company's technical assets and capabilities in an increasingly complex business landscape can provide significant advantages. This blog will explore the benefits of conducting sell-side technical due diligence and how this process unlocks hidden value.
Enhancing Deal Valuation and Negotiation
One of the primary benefits of sell-side technical due diligence is its ability to enhance deal valuation and negotiation. By thoroughly evaluating a company's technological assets, infrastructure, and internal processes, the company’s management team gains a deeper understanding of the actual value of the business. With this knowledge, negotiators can engage in more informed discussions, leading to better deal terms and conditions.
Identifying and Mitigating Risks
Technical risks can significantly impact the success of an investment. Whether it's evaluating the cybersecurity measures in place, assessing the robustness of the technology infrastructure, or identifying any process improvements in the software development lifecycle, thorough technical due diligence uncovers critical risks that might otherwise be missed.
Uncovering Growth Opportunities
Sell-side technical due diligence can uncover hidden growth opportunities. The process can help understand where value can be added by assessing the technical capabilities and innovation potential. This may include leveraging existing technologies for new markets, developing innovative products or services, or optimizing operational processes. Understanding the company's technical landscape equips the seller with the insights needed to formulate growth strategies and create value before exit.
Gaining Credibility with Stakeholders
Conducting sell-side technical due diligence also helps the seller gain credibility with various stakeholders, including lenders, partners, and co-investors. Trust and transparency play a vital role in today's competitive investment landscape. Comprehensive sell-side technical due diligence reports demonstrate a commitment to thorough analysis and risk assessment. This can foster trust and enhance credibility with stakeholders.
Benchmarking and Cost Analysis
A sell-side engagement would also include benchmarking and cost analysis, enabling both the buyer and seller to understand where the company stands. Cost analysis involves evaluating the company's technology-related costs (e.g., reviewing infrastructure and R&D spending) and identifying potential cost-saving measures or optimization opportunities. It helps assess the efficiency and effectiveness of the company's technical operations, infrastructure investments, and resource allocation. Benchmarking involves comparing the company's technical and operational metrics against industry standards or best practices (e.g., revenue per employee). It helps assess the company's performance relative to its peers and identify areas of strength or improvement.
Strengthening Exit Strategies
Sell-side technical due diligence can contribute significantly to strengthening exit strategies. By thoroughly assessing the company's technical assets, internal processes, and organizational structure, it’s possible to identify potential value drivers that enhance its attractiveness to potential buyers.
How A Technical Due Diligence Provider Can Help
A Technical Due Diligence Provider can facilitate a sell-side technical due diligence process. Their expertise and experience in assessing technical assets and identifying risks and opportunities add significant value to the due diligence process. A Technical Due Diligence Provider can help in three ways:
Expert Assessment and Analysis
A Technical Due Diligence Provider brings a team of experienced professionals with deep technical knowledge and expertise across various industries. They comprehensively evaluate the company's technical architecture, infrastructure, systems, and processes. This assessment includes analyzing the robustness of the technology stack, assessing cybersecurity measures, reviewing open-source licensing exposure, evaluating the scalability of systems, and reviewing compliance with industry standards and regulations. Through thorough analysis, the Technical Due Diligence Provider delivers a detailed, unbiased report enabling informed investment decisions.
Risk Mitigation and Opportunity Identification
The Technical Due Diligence Provider helps identify and mitigate technical risks. The provider uncovers potential vulnerabilities, such as outdated technology or inadequate cybersecurity measures, by conducting a deep dive into the technical aspects. They assess the potential impact of these risks on the investment and provide recommendations for risk mitigation strategies. Additionally, the provider identifies growth opportunities within the company's technical capabilities. They analyze the technology assets, innovation potential, and scalability, helping understand how to leverage these strengths for future growth and value creation before exit.
Businesses can comprehensively understand their AI readiness and uncover potential AI opportunities. It provides valuable insights into data assets, technical capabilities, IP portfolio, and growth potential, helping identify areas where AI can be strategically applied to drive innovation, efficiency, and competitive advantage.
Streamlined Process and Expert Guidance
Conducting sell-side technical due diligence requires coordination and a systematic approach. A Technical Due Diligence Provider facilitates the entire process, ensuring a streamlined and efficient assessment. They work closely with the stakeholders to gather relevant information and conduct interviews. The provider's experts guide the team through the technical evaluation, explaining complex technical concepts and findings clearly and concisely. By providing expert guidance and support throughout the process, the Technical Due Diligence Provider ensures that the sell-side technical due diligence is conducted effectively, supporting well-informed decisions and optimizing the investment outcome.
Summary Of Key Sell-Side Benefits
Explores Risks Early: Helps the seller uncover issues and potentially resolve or implement a mitigation plan.
Prepares The Team: Helps a company practice and exercise what they need to do. This is especially important for teams who have never been through this process.
Improves Readiness For Sale: Helps make the future process for potential buyers easier where the necessary documentation and data are prepared and ready.
Uncovers Blind Spots: Assessing oneself with an external unbiased view can point out blind spots that may not be visible to the team.
Increases Appeal: Being proactive and ready indicates commitment, making sellers/companies more appealing.
Produces Trusted Documentation: The resulting reports are helpful to both the buyers and sellers. The buyers will have a VDD (Vendor Due Diligence) report ready for their consumption, and the sellers will have an internal report with improvement opportunities to address.
Sell-Side Packages
Three Options To Consider As Part Of A Sell-Side Engagement
Phase 1
The internal report is created for the benefit of the company’s management team, guiding them through any issues to address before the sale as part of the sell-side preparation. It also includes coaching from the technical due diligence provider, for example, guidance on producing a product or technical roadmap if absent. It helps prepare the team to identify appropriate documents to share in a VDR (Virtual Data Room) during the sales process (e.g., product roadmap, technical roadmap, SWOT analysis, etc.). This internally focused phase would typically be recommended ~6-12 months before the sale and take ~3-4 weeks to conclude.
Phase 2
The sell-side vendor due diligence (VDD) report facilitates the sales process, enhances buyer confidence, streamlines due diligence, and improves negotiations and valuation. It provides potential buyers or investors with a comprehensive and transparent assessment of the company's technical landscape, enabling them to make informed decisions and move forward with the transaction more confidently. It can also outline opportunities for the buyer to do value creation. This externally focused phase is recommended ~1-3 months before the sale and takes ~3-4 weeks to conclude.
Full (Phase 1 + 2)
A full sell-side technical diligence will typically take ~6-8 weeks (elapsed time), based on producing an internal and external (VDD) report back to back, with a limited risk mitigation period (e.g., ~1-2 months). The buy-side team would review the VDR documents with the external (VDD) report. The more comprehensive these VDR documents are, the more confidence the buy-side team gains.
Sell-Side Engagement Stages
The sell-side project is run in stages. The illustration above highlights the seven typical steps of a full sell-side engagement, including an internal and external (VDD) report. It includes discovery sessions with the company’s team, where deep dives occur on various technical, process, and organizational aspects. The process also includes producing a value-creation plan, highlighting any key planned improvements the company intends to make.
Conclusion
In conclusion, sell-side technical due diligence is a powerful tool that empowers sellers to make well-informed investment decisions, maximize value creation, and drive optimal exit value. By comprehensively assessing the company's technical landscape, the seller can mitigate risks, uncover opportunities, and strengthen their investment strategies. Embracing sell-side technical due diligence as an integral part of the process will facilitate staying ahead in today's dynamic business environment and achieving sustainable success.
Sell-side technical due diligence can help increase the exit value of a company by enhancing transparency, mitigating risks, highlighting growth opportunities, validating the technology and intellectual property, optimizing operational efficiency, and differentiating the company in a competitive market. These factors collectively create a more compelling value proposition for potential buyers, contributing to a higher exit value.
If you are entering an M&A transaction with a potential investor/acquirer, contact us to learn how we can help you achieve a successful outcome and an optimal exit value.
About the Author
Jon White is an experienced technology leader with over 34 years of international experience in the software industry, having worked in the UK, Malaysia, Bulgaria, and Estonia. He holds a BSc (Hons) in Systems Design. He led the Skype for Windows development teams for many years (with 280 million monthly connected users), playing a pivotal role in the team's transition to Agile.
Jon has held multiple leadership positions throughout his career across various sectors, including loyalty management, internet telecoms (Skype), IT service management, real estate, and banking/financial services.
Jon is recognized for his expertise in agile software development, particularly helping organizations transform to agile ways of working (esp. Scrum), and is a specialist in technical due diligence. He is also an experienced mentor, coach, and onboarding specialist.
Over the last few years, he has completed over a hundred due diligence and assessment projects for clients, including private equity, portfolio companies, and technology companies, spanning multiple sectors. Contact Jon at jon.white@ringstonetech.com.