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Sell-side Technical Due Diligence Checklist

Updated: Oct 18, 2023


Preparing for a sell side technical diligence is pivotal to ensuring a smooth transaction

Introduction

In the world of mergers and acquisitions (M&A), preparing for a sell-side technical due diligence is pivotal to ensuring a smooth and successful transaction. This meticulous process involves showcasing the technical prowess of your company, addressing potential concerns, instilling confidence in potential buyers, and highlighting the opportunities ahead.


As the business landscape becomes increasingly tech-driven, thorough technical due diligence can significantly impact the valuation and terms of the deal. This blog presents comprehensive checklists outlining the crucial steps to prepare for sell-side technical due diligence for software and IT-enabled companies.


By following this guide, you can position your company for a seamless future buy-side due diligence process and enhance your prospects of achieving a favorable outcome and optimal valuation in the M&A journey.


QUICK LINKS TO CHECKLISTS

Checklist for sell-side diligence on a software company

Checklist for sell-side diligence on an IT-enabled company


Software Companies Versus IT-Enabled Companies


Software Company

A software company primarily designs, develops, and distributes software products or solutions. Its core business revolves around creating software applications, platforms, or tools that serve specific purposes or address particular needs. The primary value proposition of a software company lies in its software offerings and data insights, often sold as standalone products or subscription-based services. Examples of software companies include Microsoft, Adobe, and Salesforce.

 
The Primary Value Proposition Of A Software Company Lies In Its Software Offerings & Data
 

IT-Enabled Company

On the other hand, an IT-enabled company, also known as an information technology-enabled company, incorporates technology, including software, into its operations to enhance efficiency, productivity, and overall business processes. While not necessarily focused on creating software products as their core business, IT-enabled companies use technology to optimize their operations, such as communication, data management, customer service, and more.


The technology enables streamlining workflows, improving decision-making, and enhancing the overall business environment. These companies may develop or customize software to meet their specific operational needs but do not primarily generate revenue from selling software products. Examples of IT-enabled companies include banks using software for online transactions, manufacturing companies using software for supply chain management, and healthcare providers using software for electronic health records.

 
IT-Enabled Companies Use Technology To Optimize Their Operations
 

Key Differences: Sell-Side Diligence For Software Versus IT-Enabled Companies


1. Software Development Processes and Intellectual Property

  • Software Company: Due diligence for a software development company would extensively examine software development processes, coding practices, version control, intellectual property rights, software architecture, and the company's software development life cycle.

  • IT-Enabled Company: The focus would shift away from software development processes for a company that doesn't develop its own software. Instead, the diligence would emphasize IT infrastructure, data management, cybersecurity, IT service management, and third-party software solutions.

2. Intellectual Property Portfolio and Licensing

  • Software Company: Intellectual property (IP) ownership and licensing agreements would be critical. Due diligence would analyze the company's IP portfolio, software licenses, open-source software usage, and any potential legal issues related to IP infringement.

  • IT-Enabled Company: While IP ownership could still be relevant for certain technology solutions, the focus might be more on ensuring the company has the necessary rights and licenses for the software tools and services it utilizes.

3. Codebase and Technology Stack

  • Software Company: For software development companies, an in-depth assessment of the codebase, technology stack, software architecture, and code quality would be integral to the diligence process.

  • IT-Enabled Company: This level of scrutiny on the codebase and technology stack would be less relevant for a company that doesn't create its own software.

4. Product Development Lifecycle

  • Software Company: The due diligence process would delve into the product development lifecycle, including requirements gathering, design, development, testing, deployment, and ongoing updates.

  • IT-Enabled Company: For an IT-enabled company, the emphasis would be more on IT governance, vendor management, cybersecurity, data handling, and service reliability.

5. IT Services and Third-Party Relationships

  • Software Company: While both types of companies may have third-party relationships, for a software company, there could be a greater focus on partnerships related to software development tools, integrations, and platform services.

  • IT-Enabled Company: The diligence would emphasize IT service providers, technology vendors, cloud services, cybersecurity vendors, and other IT-related partnerships.

The Importance Of Doing A Sell-Side Diligence


Technology sell-side diligence process lasts ~4-6 weeks

Figure 1: Sell-Side Technical Due Diligence Process


Sell-side diligence, a comprehensive assessment of a company's strengths, weaknesses, and potential risks before entering a transaction, is paramount in mergers and acquisitions (M&A). This proactive approach empowers sellers with a deeper understanding of their business, enabling them to position their company optimally and enhance its attractiveness to potential buyers. By undertaking sell-side diligence, companies gain the upper hand in negotiations, streamline the due diligence process, identify and mitigate risks, explore opportunities, and increase the likelihood of achieving a favorable deal outcome and fair valuation.


Firstly, sell-side diligence allows sellers to take control of the narrative. By proactively identifying and addressing potential issues or concerns, companies can present a transparent and credible image to potential buyers. This transparency builds trust and reduces the chances of surprises emerging during the buyer's due diligence phase, which could lead to renegotiations or deal derailment. Sellers who conduct thorough sell-side diligence gain the ability to showcase their strengths, competitive advantages, and growth potential, positioning themselves as attractive investment opportunities.


Secondly, sell-side diligence accelerates the M&A process. By providing detailed and well-organized documentation upfront; sellers expedite the due diligence phase for potential buyers. This efficiency minimizes the time spent on extensive data requests, reviews, and evaluations, allowing the deal to progress swiftly and reducing the risk of delays. Buyers are more likely to engage positively with a transaction when they encounter a comprehensive due diligence package that promptly addresses their concerns and questions. As a result, sell-side diligence streamlines the overall deal timeline and enhances the buyer's confidence in the transaction.


Lastly, sell-side diligence enhances negotiating power. With a thorough understanding of their company's strengths and weaknesses, sellers are better equipped to engage in negotiations from a position of knowledge. They can confidently address buyer inquiries, respond to concerns, and justify their valuation expectations based on documented evidence. This knowledge empowers sellers to defend their company's value, negotiate terms more effectively, and achieve a deal outcome that aligns with their strategic objectives.


Summary Of The Importance Of Sell-Side Diligence In M&A

  1. Enhanced Positioning: Gain insights, optimize presentation, and establish credibility with potential buyers.

  2. Efficient Process: Speed up due diligence, minimize delays, and maintain buyer engagement.

  3. Empowered Negotiations: Approach discussions confidently, address inquiries effectively, and defend valuations.

  4. Transparency and Trust: Proactively address concerns, reduce surprises, and build trust with transparent information.

  5. Strategic Showcase: Highlight strengths, advantages, and growth potential, attracting suitable buyers.

  6. Confident Progression: Manage data requests efficiently, ensuring a smoother deal timeline.

  7. Informed Alignment: Justify valuations, negotiate effectively, and achieve outcomes aligned with objectives.


Sell-Side Preparation Versus Vendor Due Diligence (VDD)


Sell-side preparation for due diligence and vendor due diligence (VDD) are two distinct approaches in mergers and acquisitions (M&A) that involve assessing and evaluating a company's operations and financials. Let's delve into the differences between these two approaches:


Sell-Side Preparation for Due Diligence

Sell-side preparation involves the seller taking proactive steps to prepare, organize, mitigate, identify opportunities, articulate the value proposition, and present information to potential buyers. This exercise would typically take ~2-3 weeks to complete.


The aim is to present a transparent and appealing view of the company to potential buyers during the due diligence. By undertaking sell-side preparation, the seller anticipates buyer inquiries and addresses potential concerns upfront. This approach lets the seller control the narrative, showcase strengths, and mitigate risks. It can result in a smoother and faster due diligence process, enhancing buyer confidence and potentially leading to a more favorable deal outcome.


This internal readiness phase would typically be conducted ~6-12 months before the sale. Third-party providers can also provide assistance during this phase, including coaching and performing an internal due diligence report to help identify and mitigate risks and opportunities.


Vendor Due Diligence (VDD)

Vendor due diligence is conducted by a seller's third-party advisory or consulting firm to assess the company's operations, financials, and other relevant aspects. Unlike the sell-side preparation approach, where the seller takes the initiative, vendor due diligence involves external experts evaluating the company on the seller's behalf. The goal is to provide potential buyers with an independent and credible evaluation of the company's performance, strengths, and risks. The vendor due diligence report is shared with prospective buyers to aid their decision-making process. This approach offers a level of impartiality and objectivity that can enhance the credibility of the information presented. It can also expedite the due diligence process by giving buyers a comprehensive overview of the company's status.


This Vendor Due Diligence (resulting in an “external” report) would typically be performed ~3-6 months before the sale. It will result in a professional report that helps a future buy-side team understand the technical landscape of the business. VDD typically takes ~3-4 weeks to complete (plus additional hours for investor discussions). If combined with sell-side preparation, it’s ~4-6 weeks of work.


In summary, sell-side preparation involves the seller taking proactive steps to organize and present information to potential buyers. In contrast, vendor due diligence involves engaging third-party experts to evaluate the company's operations and financials on the seller's behalf. Both approaches aim to enhance transparency, build trust, and facilitate a smoother due diligence process, ultimately contributing to successful M&A transactions.

Sell-side preparation involves the seller taking proactive steps to prepare, organize, mitigate, identify opportunities, and articulate the value proposition to present information to potential buyers. In contrast, Vendor Due Diligence (VDD) involves engaging third-party experts to evaluate the company's operations and financials on the seller's behalf.

The Top Benefits Of Conducting Sell-Side Technical Due Diligence

  • Explore Risks Early: Helps the seller uncover issues and potentially resolve or implement a mitigation plan.

  • Practice Makes Perfect: Helps a team practice and exercise what they need to do. This is especially important for teams that have not been through a similar process.

  • Diligence Is A Demanding Exercise: Helps make the future process for potential buyers easier where the necessary documentation and data are prepared and ready.

  • Uncover Blind Spots: Assessing oneself with an external unbiased view can point out blind spots that may not be visible to the team.

  • Increase Appeal: Being proactive and ready indicates commitment that makes sellers/companies more appealing.

  • Trusted Documentation: The resulting reports are useful to 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.

  • Emphasise Value: A great VDD helps articulate value and opportunities for potential investors who are typically looking to understand where they can be of assistance to help growth and efficiencies.


Sell-Side Diligence Checklist For Software Companies


1. Understand the Process

  • Familiarize yourself with the goals and expectations of technical due diligence.

  • Ideally, engage with a third-party technical due diligence provider to guide you.

  • Gather insights on what potential buyers will likely assess and scrutinize.

  • Familiarize yourself with strategies for driving exit value.

  • This will help you experience a smoother future buy-side diligence.

2. Assemble a Dedicated Team

  • Form a team of internal experts, including technical, legal, and financial representatives.

  • Assign clear roles and responsibilities to team members for streamlined coordination.

  • Get some coaching from a 3rd party due diligence provider to provide practical advice.

  • This process will help team members deliver a coherent message in future diligence.

 
A Dedicated Team Offers Efficiency, Credibility, And A Potentially Faster Transaction
 

3. Documentation Review

  • Gather and organize technical documentation, including architecture/infrastructure diagrams, system documentation on the development lifecycle, and product & technical roadmaps.

  • Collect key metrics such as infrastructure spending and R&D spend, including “trends”.

  • Showcase the return on technology investments and their contribution to business growth.

  • Companies with a strong focus on recurring revenue models, such as subscription-based services, enjoy more predictable revenue streams.

  • Predictable revenue enhances the company's valuation, reducing uncertainty and providing greater financial stability.

  • Consistent revenue growth, healthy profit margins, and positive cash flow are essential financial indicators for a higher valuation.

  • If applicable, any transformation plans for significant, planned improvements.

  • Familiarize yourself with the strategies to avoid transformation failure and align plans to mitigate risks.

  • Assess any strategies you can document that address cost optimization opportunities. Ideally, formulate plans to demonstrate your focus on cost efficiency - a potential buyer will respect this.

  • Ensure that documentation is up-to-date, accurate, and comprehensive.

  • This will help reduce future efforts in diligence by having materials ready on-demand for a future Information Request List (IRL) that a buy-side team would send.

4. Intellectual Property (IP) Audit

  • Due diligence would analyze the company's IP portfolio, software licenses, open-source software usage, and any potential legal issues related to IP infringement.

  • Intellectual property assets demonstrate the company's innovation, competitive advantage, and potential for generating revenue through licensing or protection against infringement.

  • Companies with technology that offers unique differentiators or solves critical industry challenges tend to have higher valuations.

  • By presenting a well-managed and legally sound IP portfolio, the company can increase its appeal to potential buyers and potentially influence the terms and value of the transaction.

5. Product Strategy & Roadmap

  • Provide details on:

    • Product strategy health & process, SWOT awareness

    • Product roadmap health & process, technical debt allocation health, product backlog health, prioritization method

    • Product and Engineering team collaboration health, product leadership, data-driven capabilities, new feature allocation health

    • Configurability v customization, product management tools, metrics usage

  • This may also be expanded to cover a product portfolio across multiple product suites, highlighting any synergy, R&D cost sharing, resource sharing, technology cross-leverage, and revenue balance between products.

  • Gather customer feedback, NPS scores, and testimonials to showcase the company's positive reputation.

  • These metrics help validate reputation, reduce risks, ensure stable revenue streams, differentiate from competitors, and provide insights into client product needs.

  • The company can reveal its innovative initiatives and anticipate market shifts by analyzing the product strategy and roadmap.

  • Enhances transparency, builds buyer confidence, and positions the company favorably in negotiations.

  • Demonstrates its adaptability and potential for long-term success and understanding of competition.

6. Software, Architecture, Applications & Data Management Analysis

  • List all software applications and tools the company uses.

  • Evaluate software licenses, version control, and development practices.

  • Assess data storage practices, governance, and privacy protocols.

  • Be prepared to defend any AI/Machine learning use or outline future plans to adopt this technology. You may leverage third-party solutions even if you are not developing them yourself.

  • This process enhances transparency, highlights strengths and weaknesses, addresses technical debt, and evaluates scalability and growth potential.

  • Ensure compliance with data protection regulations and user consent requirements.

  • Be prepared to conduct a code walkthrough, identifying a lead engineer (or hands-on CTO) to lead that session during the future buy-side process.

  • Practice a code walkthrough dry run, walking through some key components (e.g., 1 or 2 key components) and potentially showcasing corresponding unit tests.

  • By conducting this analysis, the company positions itself as technologically competent, proactive in risk management, and well-prepared for the sell-side due diligence process.

  • By showcasing strong data management practices, the company positions itself as well-prepared and transparent, positively impacting its perceived value and increasing its appeal to potential buyers.

7. Cybersecurity Assessment

  • Collaborate with cybersecurity experts to assess the company's cybersecurity risks, including firewalls, encryption, access controls, and incident response plans.

  • By showcasing a strong cybersecurity posture, the company positions itself as a secure investment opportunity, increasing its attractiveness and potentially influencing the transaction terms.

  • Prepare your ISO 27001 certificate (if applicable) to add to the VDR (helps the buy-side team). If you don’t have ISO certification, consider preparing plans to acquire this.

8. Software Development Lifecycle

  • Explain software development processes (e.g., Agile methodologies) to ensure consistent product delivery.

  • Analyze end-to-end execution capabilities, maturity, quality approach, processes, and ability to efficiently deliver on the product roadmap.

  • Provides a clear understanding of the company's commitment to delivering reliable, high-quality products or services, emphasizing operational excellence and customer satisfaction.

  • By identifying strengths and areas for enhancement in quality assurance, the company can demonstrate its dedication to minimizing risks and ensuring consistent performance.

  • Enhances transparency and builds trust with potential buyers.

  • Positions the company favorably in negotiations, contributing to a more favorable deal outcome by highlighting its reliability and ability to maintain long-term customer relationships.

9. Organizational & Leadership Review

  • Document the technical team's composition, roles, expertise, and attrition over the last 12-24 months.

  • Highlight employee retention strategies, key technical personnel, and leadership tenure.

  • If you have a distributed development team, be prepared to defend the distributed organizational setup.

  • This process gives potential buyers insights into operational efficiency, strategic alignment, management capabilities, and organizational culture.

  • A competent and experienced management team demonstrates effective leadership and the ability to drive growth.

  • By showcasing a well-structured and effective operational framework, the company enhances its perceived value and attractiveness to potential buyers, ultimately contributing to a successful transaction.

10. Third-Party: Vendor, Supplier & Outsourcing Relationships

  • Assess vendor contracts, dependencies, and performance to ensure a reliable supply chain.

  • Provide details about vendor selection, outsourcing, SLAs, data security & compliance, risk management & contingency plans.

  • There is a greater focus on partnerships related to software development tools, integrations, and platform services.

  • Evaluating vendor and supplier relationships enhances the sell-side diligence process by identifying risks, assessing procurement efficiency, understanding supplier diversity, and providing insights into long-term agreements.

  • Reduces operational risks and disruptions.

  • By showcasing a well-managed and transparent approach to vendor and supplier relationships, the company positions itself as capable of managing external partnerships effectively, enhancing its perceived value in the eyes of potential buyers.

11. Product IT Infrastructure

  • Provide details about hosting deployment health and monitoring for the IT infrastructure that underpins the products the company develops.

  • Outline DevOps structure, deployment process, compliance, and deployment tools.

  • Analyze cost efficiency, outage metrics, and team SLAs (internal/external).

  • Assess various non-functional requirements, including scalability, capacity, reliability, supportability, evolvability, and availability.

  • Allows the company to showcase the reliability and scalability of its technological backbone, reinforcing its operational stability and capacity to support growth.

  • The company can identify potential weaknesses by analyzing Product IT infrastructure, optimizing resource allocation, and ensuring alignment with business objectives.

  • Enhances transparency, builds buyer confidence, and positions the company favorably in negotiations.

  • This process showcases the company's growth potential, operational resilience, and commitment to maintaining optimal performance.

  • Software companies with scalable and innovative technology solutions are often valued higher.

  • A buy-side team will likely emphasize scalability, so being prepared with materials will help smoothen a future buy-side diligence process.

  • Demonstrates its technological prowess and readiness for future challenges.

12. System Integration and Interoperability

  • Evaluate how different technology systems and applications integrate and communicate.

  • Identify potential data exchange and interoperability challenges.

  • Companies with well-integrated systems position themselves as attractive investment opportunities that can enhance operational effectiveness and provide a smooth transition for potential buyers, ultimately influencing the valuation and success of the transaction.

  • Buyers perceive companies with robust integration and interoperability capabilities as lower-risk investments, which can positively influence the company's valuation.

  • A buyer's investment thesis will likely contain some reference to the integration capabilities. Hence, preparing materials about integration possibilities will help smoothen a future buy-side diligence process.

13. Regulatory and Compliance Check

  • Identify industry-specific regulations and compliance requirements.

  • Ensure the company's adherence to relevant standards and regulations.

  • Organized documentation of compliance efforts demonstrates professionalism and indicates that the company is well-prepared for the transaction.

  • A thorough compliance check ensures the company adheres to relevant laws, regulations, and standards.

  • Demonstrating compliance enhances the company's credibility and minimizes the risk of legal liabilities post-acquisition.

  • Compliance with data privacy regulations, such as GDPR or HIPAA, is crucial in today's digital landscape.

  • A compliance check assesses the company's data handling practices, ensuring that customer and employee data is protected.

  • Demonstrating strong data privacy measures can positively impact the company's reputation and valuation.

  • By showcasing a commitment to regulatory compliance, the company positions itself as a responsible and transparent investment opportunity, reducing legal risks and increasing its attractiveness to potential buyers.

14. Business Continuity Planning (BCP)

  • Review disaster recovery and business continuity plans for technology systems.

  • Assess the readiness to respond to and recover from technical disruptions.

  • Prepare key metrics such as Recovery Time Objective (RTO) and Recovery Point Objective (RPO) as these would typically be requested in the IRL.

    • RTO measures the maximum acceptable downtime for critical systems or processes after a disruption occurs. It helps the company determine how quickly it needs to recover its operations to minimize disruptions and maintain service levels.

    • RPO defines the maximum acceptable data loss in case of a disruption. It determines how often data backups should be performed to ensure minimal data loss during recovery.

  • BCP helps demonstrate risk mitigation, operational resilience, customer confidence, legal compliance, and a commitment to maintaining operations during disruptions.

  • By showcasing a strong BCP, the company positions itself as a reliable and prepared investment opportunity, reducing risk perceptions and increasing its attractiveness to potential buyers.

15. Service Level Agreements (SLAs)

  • Review SLAs to ensure service quality meets or exceeds client expectations.

  • Review key metrics such as SLA response and resolution times.

  • Validates the company's ability to deliver consistent value to clients.

  • Provides insights into service quality, client satisfaction, operational efficiency, risk management, and client relationships.

  • Positive SLA compliance rates demonstrate the company's commitment to delivering value and meeting commitments, thereby increasing its attractiveness to potential buyers.

16. Audit Legacy Systems & Review Past Technical Challenges

  • Identify any legacy systems or outdated technologies that must be addressed.

  • Evaluate potential technical debt and its impact on future scalability and maintenance.

  • Assess historical technical challenges, incidents, and their resolutions.

  • Highlight lessons learned and improvements implemented.

  • These activities provide potential buyers with insights into the company's technology landscape, historical performance, and ability to manage and overcome technical hurdles.

  • By showcasing the company's ability to navigate challenges, learn from experiences, and adapt to evolving technological demands, these activities enhance the company's perceived value.

 
Evaluate Potential Technical Debt And Its Impact On Future Scalability And Maintenance
 

17. Prepare Mitigation Plan(s)

  • Produce a plan to address any gaps that need to be addressed, with estimated costs and resource allocations.

  • Potential buyers view companies that actively address risks as more attractive and less likely to encounter unexpected disruptions post-acquisition.

  • Sharing mitigation plans with potential buyers promotes transparency and open communication. It shows that the company is forthcoming about potential challenges and is prepared to discuss how it plans to manage them.

  • Some mitigations are easier than others. It is important to be tracked in the backlog.

  • Walking into a company where they have problems, but they know about them and track them, gives more confidence than walking into one without awareness.

  • By outlining clear strategies, action steps, resource allocation, and timelines, the company enhances its perceived value and positions itself as a well-prepared and resilient investment opportunity for potential buyers.

18. Customer Onboarding Process

  • Outline how the company onboards new clients efficiently.

  • Provides insights into the company's ability to efficiently integrate new clients, showcasing its commitment to a seamless customer experience and rapid value delivery.

  • By identifying strengths and potential areas for improvement in the onboarding process, the company can demonstrate its dedication to customer satisfaction and retention.

  • Enhances transparency, instills buyer confidence, and positions the company favorably in negotiations by highlighting its operational efficiency and customer-centric approach, ultimately contributing to a more successful and appealing transaction outcome.

  • Highlights the company's ability to scale operations.

19. Collaborate Across Disciplines

  • When companies run VDD for commercial and technical, there is a lot of collaboration between and consistency in numbers with shared data needed.

  • Engage legal experts to review technology-related contracts, intellectual property rights, and regulatory compliance.

  • Address any potential legal risks related to technology assets.

  • Collaboration across diligence streams provides a holistic assessment, identifying cross-functional dependencies, developing comprehensive risk mitigation strategies, and ensuring consistent and accurate information for potential buyers.

  • Fundamentally, this collaboration helps to “connect the dots” for the buyer.

  • By working together, different diligence streams contribute to a more effective due diligence process and enhance the company's overall value proposition.

20. Create a Comprehensive Due Diligence Package

  • Compile all relevant information, documentation, and assessments into a comprehensive due diligence package.

  • Ensure the package is organized, easily accessible, and addresses potential buyer inquiries.

  • Prepare a data room (VDR) and structure it logically to hold all the technical documentation you have prepared.

  • By showcasing a comprehensive package that includes a well-structured VDR, documents, and information to help answer the IRL, any future buy-side diligence will run much smoother and present a positive impression to the potential buyer.

Sell-Side Diligence Checklist For IT-Enabled Companies


1. Understand the Process

  • Familiarize yourself with the goals and expectations of technical due diligence.

  • While you may not develop any software yourself, you still need to be able to defend your technical landscape, choice of technology systems, and approach to configuration versus customization.

  • Familiarize yourself with strategies for driving exit value.

  • Ideally, engage with a third-party technical due diligence provider to guide you.

  • Gather insights on what potential buyers will likely assess and scrutinize.

  • This will help you experience a smoother future buy-side diligence.

2. Assemble a Dedicated Team

  • Form a team of internal experts, including technical, legal, and financial representatives.

  • Assign clear roles and responsibilities to team members for streamlined coordination.

  • Get some coaching from a 3rd party due diligence provider to provide practical advice.

  • This process will help team members deliver a coherent message in future diligence.

 
A Dedicated Team Offers Efficiency, Credibility, And A Potentially Faster Transaction
 

3. Documentation Review

  • Gather and organize technical documentation, including architecture/infrastructure diagrams, system documentation on the development lifecycle, and product & technical roadmaps.

  • Collect key metrics such as infrastructure spending.

  • If the IT-enabled company develops its own software, it would include R&D spend, including “trends”.

  • Showcase the return on technology investments and their contribution to business growth.

  • Companies with a strong focus on recurring revenue models, such as subscription-based services, enjoy more predictable revenue streams.

  • Predictable revenue enhances the company's valuation, reducing uncertainty and providing greater financial stability.

  • Consistent revenue growth, healthy profit margins, and positive cash flow are essential financial indicators for a higher valuation.

  • If applicable, any transformation plans for significant, planned improvements.

  • Familiarize yourself with the strategies to avoid transformation failure and align plans to mitigate risks.

  • Assess any strategies you can document that address cost optimization opportunities. Ideally, formulate plans to demonstrate your focus on cost efficiency - a potential buyer will respect this.

  • Ensure that documentation is up-to-date, accurate, and comprehensive.

  • This will help reduce future efforts in diligence by having materials ready on-demand for a future Information Request List (IRL) that a buy-side team would send.

4. IT Infrastructure

  • Provide details about hosting deployment health and monitoring for the business's underlying IT infrastructure that supports its service offering.

  • Outline DevOps structure (if applicable), deployment process, compliance, and deployment tools.

  • Analyze cost efficiency, outage metrics, and team SLAs (internal/external).

  • Assess various non-functional requirements, including scalability, capacity, reliability, supportability, evolvability, and availability.

  • Allows the company to showcase the reliability and scalability of its technological backbone, reinforcing its operational stability and capacity to support growth.

  • The company can identify potential weaknesses by analyzing IT infrastructure, optimizing resource allocation, and ensuring alignment with business objectives.

  • Enhances transparency, builds buyer confidence, and positions the company favorably in negotiations.

  • This process showcases the company's growth potential, operational resilience, and commitment to maintaining optimal performance.

  • Software companies with scalable and innovative technology solutions are often valued higher.

  • Scalability ensures the company can handle increased demand.

  • A buy-side team will likely emphasize scalability, so being prepared with materials will help smoothen a future buy-side diligence process.

  • Demonstrates its technological prowess and readiness for future challenges.

  • Contributes to a more informed and favorable transaction outcome.

5. Service Level Agreements (SLAs)

  • Review SLAs to ensure service quality meets or exceeds client expectations.

  • Review key metrics such as SLA response and resolution times.

  • Validates the company's ability to deliver consistent value to clients.

  • Provides insights into service quality, client satisfaction, operational efficiency, risk management, and client relationships.

  • Positive SLA compliance rates demonstrate the company's commitment to delivering value and meeting commitments, thereby increasing its attractiveness to potential buyers.

6. Third-Party: Vendor, Supplier & Outsourcing Relationships

  • Assess vendor contracts, dependencies, and performance to ensure a reliable supply chain.

  • Provide details about vendor selection, outsourcing, SLAs, data security & compliance, risk management & contingency plans.

  • Diligence would emphasize IT service providers, technology vendors, cloud services, cybersecurity vendors, and other IT-related partnerships.

  • Evaluating vendor and supplier relationships enhances the sell-side diligence process by identifying risks, assessing procurement efficiency, understanding supplier diversity, and providing insights into long-term agreements.

  • Reduces operational risks and disruptions.

  • By showcasing a well-managed and transparent approach to vendor and supplier relationships, the company positions itself as capable of managing external partnerships effectively, enhancing its perceived value in the eyes of potential buyers.

7. Operational Resilience Plan

  • Present a plan detailing how the company maintains operations during disruptions (i.e., business continuity plan), including contingency measures.

  • Assures buyers of business continuity.

  • Prepare key metrics such as Recovery Time Objective (RTO) and Recovery Point Objective (RPO), as these would typically be requested in the IRL.

  • RTO measures the maximum acceptable downtime for critical systems or processes after a disruption occurs. It helps the company determine how quickly it needs to recover its operations to minimize disruptions and maintain service levels.

  • RPO defines the maximum acceptable data loss in case of a disruption. It determines how often data backups should be performed to ensure minimal data loss during recovery.

  • BCP helps demonstrate risk mitigation, operational resilience, customer confidence, legal compliance, and a commitment to maintaining operations during disruptions.

  • By showcasing a strong BCP, the company positions itself as a reliable and prepared investment opportunity, reducing risk perceptions and increasing its attractiveness to potential buyers.

8. Cybersecurity Assessment

  • Collaborate with cybersecurity experts to evaluate the company's cybersecurity measures, including firewalls, encryption, access controls, and incident response plans.

  • Mitigates data breach risks and legal liabilities.

  • By showcasing a strong cybersecurity posture, the company positions itself as a secure investment opportunity, increasing its attractiveness and potentially influencing the transaction terms.

  • Prepare your ISO 27001 certificate (if applicable) to add to the VDR (helps the buy-side team). If you don’t have ISO certification, consider preparing plans to acquire this.

9. Enterprise IT & Data Strategy

  • Provide details of Enterprise IT, including systems such as:

    • Enterprise Resource Planning (ERP), Customer Relationship Management (CRM)

    • Supply Chain Management (SCM), Business Intelligence (BI), and Analytics

    • Enterprise Content Management (ECM), Data Warehousing

    • Integrated Communication Systems (i.e., email, voice, video, and messaging)

    • Tools for defining, managing, and optimizing the organization's overall technology architecture to align with business goals

    • Business Process Management (BPM) systems

  • Provide details about the data strategy, including:

    • Data governance and management, data security and privacy

    • Data analytics and utilization, data architecture and integration

  • Assess the application of IT service management and the use of third-party software solutions.

  • Be prepared to defend any AI/Machine learning use or outline future plans to adopt this technology. You may leverage third-party solutions even if you are not developing them yourself.

  • Allows the company to demonstrate its technological preparedness and forward-looking approach, highlighting its ability to effectively manage and utilize data assets.

  • By analyzing IT infrastructure and data strategies, the company can showcase operational efficiency, risk management practices, and potential for innovation.

  • Enhances transparency, builds buyer confidence, and positions the company favorably in negotiations.

  • Showcases its technological robustness and its capacity to navigate evolving digital landscapes.

10. Regulatory and Compliance Check

  • Identify industry-specific regulations and compliance requirements.

  • Ensure the company's adherence to relevant standards and regulations.

  • Organized documentation of compliance efforts demonstrates professionalism and indicates that the company is well-prepared for the transaction.

  • A thorough compliance check ensures the company adheres to relevant laws, regulations, and standards.

  • Demonstrating compliance enhances the company's credibility and minimizes the risk of legal liabilities post-acquisition.

  • Compliance with data privacy regulations, such as GDPR or HIPAA, is crucial in today's digital landscape.

  • A compliance check assesses the company's data handling practices, ensuring that customer and employee data is protected.

  • Demonstrating strong data privacy measures can positively impact the company's reputation and valuation.

  • By showcasing a commitment to regulatory compliance, the company positions itself as a responsible and transparent investment opportunity, reducing legal risks and increasing its attractiveness to potential buyers.

11. Organizational & Leadership Assessment

  • Document the technical team's composition, roles, expertise, and attrition over the last 12-24 months.

  • Highlight employee retention strategies, key technical personnel, and key leadership across the digital team.

  • This process gives potential buyers insights into operational efficiency, strategic alignment, management capabilities, and organizational culture.

  • A competent and experienced management team demonstrates effective leadership and the ability to drive growth.

  • By showcasing a well-structured and effective operational framework, the company enhances its perceived value and attractiveness to potential buyers, ultimately contributing to a successful transaction.

  • Indicates a knowledgeable workforce and talent retention.

12. IP Ownership

  • The level of scrutiny on the codebase and technology stack would be less relevant for a company that doesn't create its own software.

  • Clarify intellectual property ownership, licensing, and protections in place.

  • Ensures the company's legal and secure ownership of its intellectual property, safeguarding its technological assets and enhancing its market position.

  • The focus is on ensuring the company has the necessary rights and licenses for the software tools and services it utilizes.

  • By identifying and addressing any potential issues related to IP ownership, the company can instill buyer confidence, reduce legal risks, and present a comprehensive view of its assets.

  • Supports transparency, strengthens negotiation positions, and contributes to a more favorable deal outcome by underscoring the company's innovation, competitive edge, and commitment to long-term growth.

13. Prepare Mitigation Plan(s)

  • Produce a plan to address any gaps that need to be addressed, with estimated costs and resource allocations.

  • Potential buyers view companies that actively address risks as more attractive and less likely to encounter unexpected disruptions post-acquisition.

  • Sharing mitigation plans with potential buyers promotes transparency and open communication. It shows that the company is forthcoming about potential challenges and is prepared to discuss how it plans to manage them.

  • Some mitigations are easier than others. It is important to be tracked in the backlog.

  • Walking into a company where they have problems, but they know about them and track them, gives more confidence than walking into one without awareness.

  • By outlining clear strategies, action steps, resource allocation, and timelines, the company enhances its perceived value and positions itself as a well-prepared and resilient investment opportunity for potential buyers.

14. Customer Onboarding Process

  • Outline how the company onboards new clients efficiently.

  • Provides insights into the company's ability to efficiently integrate new clients, showcasing its commitment to a seamless customer experience and rapid value delivery.

  • By identifying strengths and potential areas for improvement in the onboarding process, the company can demonstrate its dedication to customer satisfaction and retention.

  • Enhances transparency, instills buyer confidence, and positions the company favorably in negotiations by highlighting its operational efficiency and customer-centric approach, ultimately contributing to a more successful and appealing transaction outcome.

  • Highlights the company's ability to scale operations.

15. Digital Strategy & Roadmap

  • Provide details on:

    • Digital strategy health & process, SWOT awareness

    • Roadmap health & process, technical debt allocation health, digital backlog health, prioritization method

    • Collaboration health, digital leadership, data-driven capabilities, digital features allocation health

    • Configurability versus customization of the software systems, management tools, metrics usage

  • Collect key metrics such as infrastructure spending, including “trends”.

  • Showcase the return on technology investments and their contribution to business growth.

  • Companies with a strong focus on recurring revenue models, such as subscription-based services, enjoy more predictable revenue streams.

  • Predictable revenue enhances the company's valuation, reducing uncertainty and providing greater financial stability.

  • Consistent revenue growth, healthy profit margins, and positive cash flow are essential financial indicators for a higher valuation.

  • If applicable, this may also be expanded to cover a digital portfolio across multiple systems, highlighting synergy, resource cost sharing, resource sharing, technology cross-leverage, and revenue balance between digital systems.

  • By analyzing the digital strategy and roadmap, the company can reveal its innovative initiatives, anticipate market shifts, and align digital transformation with business goals.

  • Enhances transparency, builds buyer confidence, and positions the company favorably in negotiations.

  • Demonstrates its adaptability and potential for long-term success in a rapidly evolving digital environment.

16. System Integration And Interoperability

  • Evaluate how different technology systems and applications integrate and communicate.

  • Identify potential data exchange and interoperability challenges.

  • Companies with well-integrated systems position themselves as attractive investment opportunities that can enhance operational effectiveness and provide a smooth transition for potential buyers, ultimately influencing the valuation and success of the transaction.

  • Buyers perceive companies with robust integration and interoperability capabilities as lower-risk investments, which can positively influence the company's valuation.

  • A buyer's investment thesis will likely contain some reference to the integration capabilities. Hence, preparing materials about integration possibilities will help smoothen a future buy-side diligence process.

17. Collaborate Across Disciplines

  • When companies run VDD for commercial and technical, there is a lot of collaboration between and consistency in numbers with shared data needed.

  • Engage legal experts to review technology-related contracts, intellectual property rights, and regulatory compliance.

  • Address any potential legal risks related to technology assets.

  • Collaboration across diligence streams provides a holistic assessment, identifying cross-functional dependencies, developing comprehensive risk mitigation strategies, and ensuring consistent and accurate information for potential buyers.

  • Fundamentally, this collaboration helps to “connect the dots” for the buyer.

  • By working together, different diligence streams contribute to a more effective due diligence process and enhance the company's overall value proposition.

18. Audit Legacy Systems & Review Past Technical Challenges

  • Identify any legacy systems or outdated technologies that must be addressed.

  • Evaluate potential technical debt and its impact on future scalability and maintenance.

  • Assess historical technical challenges, incidents, and their resolutions.

  • Highlight lessons learned and improvements implemented.

  • These activities provide potential buyers with insights into the company's technology landscape, historical performance, and ability to manage and overcome technical hurdles.

  • By showcasing the company's ability to navigate challenges, learn from experiences, and adapt to evolving technological demands, these activities enhance the company's perceived value.

 
Evaluate Potential Technical Debt And Its Impact On Future Scalability And Maintenance
 

19. Quality Assurance Practices

  • Explain quality control measures to ensure consistent service delivery.

  • Provides a clear understanding of the company's commitment to delivering reliable, high-quality products or services, emphasizing operational excellence and customer satisfaction.

  • By identifying strengths and areas for enhancement in quality assurance, the company can demonstrate its dedication to minimizing risks and ensuring consistent performance.

  • Enhances transparency and builds trust with potential buyers.

  • Positions the company favorably in negotiations, contributing to a more favorable deal outcome by highlighting its reliability and ability to maintain long-term customer relationships.

  • Demonstrates commitment to delivering value.

20. Create a Comprehensive Due Diligence Package

  • Compile all relevant information, documentation, and assessments into a comprehensive due diligence package.

  • Ensure the package is organized, easily accessible, and addresses potential buyer inquiries.

  • Prepare a data room (VDR) and structure it logically to hold all the technical documentation you have prepared.

  • By showcasing a comprehensive package that includes a well-structured VDR, documents, and information to help answer the IRL, any future buy-side diligence will run much smoother and present a positive impression to the potential buyer.


What Have You Got To Lose?


Risk of Undisclosed Technical Issues

Neglecting sell-side technical due diligence can expose your company to the risk of undisclosed technical issues during the buyer's due diligence process. Without a comprehensive assessment of your technology landscape, potential problems such as security vulnerabilities, outdated systems, or unresolved technical debt may remain hidden. When these issues come to light later in the transaction process, they can erode buyer confidence, lead to renegotiations, or even result in the deal falling through.

 
Skipping Assessment Risks Hidden Vulnerabilities And Technical Debt
 

Reduced Valuation and Negotiating Power

Without proper sell-side technical due diligence, your company may lack the ability to present a well-documented and compelling technology story to potential buyers. This can lead to the undervaluation of your technology assets and capabilities. Buyers may perceive a lack of transparency as a sign of operational weaknesses or hidden risks, which can negatively impact their perception of the company's value. As a result, your negotiating power may weaken, and you may have to settle for less favorable terms to your company's interests.

 
A Lack Of Transparency Can Signal Operational Weaknesses To Buyers
 

Delays, and Disruptions in the Transaction Process

The absence of sell-side technical due diligence can lead to unexpected delays and disruptions in the overall transaction process. As buyers conduct their due diligence and uncover technical issues that were not previously addressed, negotiations can stall, and additional assessments may be required. These delays can extend the transaction's timeline, causing frustration for all parties involved and potentially affecting the perceived credibility of your company.

 
Delays Can Harm Credibility, Frustrate Parties, And Extend Timelines
 

Loss of Buyer Confidence

A lack of sell-side technical due diligence can contribute to losing buyer confidence. Buyers may question the company's preparedness and transparency, leading to doubts about the company's overall management practices. Uncertainty regarding the technology landscape can create doubts about the company's ability to deliver on its promises, implement integration plans, and effectively manage the post-acquisition phase. This loss of confidence can deter potential buyers and lead to a lower interest in pursuing the transaction.

 
Tech Uncertainty Raises Doubts On Delivery, Integration, And Managing Post-Acquisition
 

What You Have To Gain By Conducting A Sell-Side Exercise?


Comprehensive Understanding of the Technological Landscape

  • Gain insights into strengths and weaknesses.

  • Assess technology infrastructure, software systems, and operational capabilities.

  • Evaluate intellectual property (if applicable).

  • Identify areas for improvement, optimization, and innovation.

Proactive Preparation and Credibility Enhancement

  • Address potential technical concerns proactively.

  • Be well-prepared for buyer inquiries.

  • Enhance credibility with potential acquirers.

Impact on Valuation and Deal Terms

  • Signal operational efficiency and readiness for integration.

  • Contribute to the positive perception among buyers.

  • Higher valuation potential due to reduced risks and synergy prospects.

Expedited Due Diligence Process

  • Streamline assessments and reviews for potential buyers.

  • Reduce time and resource requirements.

  • Enhance efficiency in the deal timeline.

Negotiating Advantage and Favorable Deal Outcome

  • Demonstrate transparency and preparedness.

  • Strengthen bargaining power during negotiations.

  • Contribute to achieving a more favorable deal outcome.

​Performing sell-side technical due diligence offers companies several advantages:

  • In-depth insights into their technological landscape.

  • Proactive risk mitigation and enhanced credibility.

  • Potential for a higher valuation based on reduced risks and synergy potential.

  • Streamlined due diligence process leading to efficiency.

  • Increased bargaining power during negotiations.

Conclusion

Not conducting sell-side technical due diligence can result in hidden technical issues emerging during the due diligence process, reduced valuation and negotiating power, delays in the transaction process, and a loss of buyer confidence. To mitigate these disadvantages, it's crucial to proactively undertake comprehensive sell-side technical due diligence (~4-6 weeks) to ensure a transparent and smooth transaction that maximizes the value of your company's technology assets.


Vendor Due Diligence is an expectation today and demonstrates care. By proactively addressing potential concerns and providing organized information in a professionally prepared report, sellers can foster trust with potential buyers, expedite the due diligence process, and create a favorable environment for successful negotiations and a seamless transaction.


Preparing for a sell-side technical due diligence is a strategic endeavor that can significantly influence the outcome of an M&A transaction. Following the comprehensive checklist outlined above, you can position your company to showcase its technical strengths, address potential concerns, and facilitate a smooth due diligence process.


Your diligence in preparing your technology landscape can enhance buyer confidence, drive competitive valuations, and contribute to a successful transaction. As the business landscape evolves, well-prepared technical due diligence becomes crucial in ensuring your company stands out and thrives in the competitive M&A landscape.

 
Tech Preparation Boosts Buyer Confidence And Valuation
 

About The Authors


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.


Hazem Abolrous has been in the software and M&A industry for over 26 years. As a managing partner at RingStone, he works with private equity firms globally in an advisory capacity.


Before RingStone, Hazem built and managed a global consultancy, coached high-profile executives, and conducted technical due diligence in hundreds of deals and transformation strategies. He spent 18 years at Microsoft in software development, incubations, M&A, and cross-company transformation initiatives.


Before Microsoft, Hazem built several businesses with successful exits, namely in e-commerce, software, hospitality, and manufacturing. He has a multidisciplinary background in computer engineering, biological sciences, and business. He has a career spanning a global stage in the US, the UK, and broadly across Europe, Russia, and Africa. He is a sought-after public speaker and mentor in software, M&A, innovation, and transformations. Contact Hazem at hazem@ringstonetech.com.

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