Have You Done Due Diligence Before Acquiring a Software/Tech Firm?

Add bookmark

Ankur Bansal


In my previous column I touched upon how technology can expedite due diligence during the M&A process. When we deal with a purchase of any asset (property, financials etc.), we spend a lot of effort in making a decision by scrutinizing everything to check for potential problems we could run into down the road.

While companies conduct detailed due diligence on financial health, legal troubles, company culture, and people of the target company, they often overlook a few areas:

  • Company’s software asset - Have you conduced due diligence on source of code, licenses, security aspects and technology compatibility?
  • Opportunity for growth – Have you analyzed the sales and account effectiveness of the organization, its people & teams and their marketing/growth strategy?

Software Asset

The prevalence of open-source code has resulted in heavy adoption of reused codes. Reusing codes and software assets may result in a situation where such software is not reviewed for potential security and ownership issues.

During M&A due diligence, software code, licensing, and security issues have to be checked and double-checked to confirm whether your company understands the license obligations (and restrictions) associated with the software your company is acquiring.

Investors, while analyzing software firms for potential acquisition, need to be certain if the code and software is in order. Investors will want to make sure that they are legally safe while using a certain software and that you have the rights to the IP assets.

  • Hire an expert to conduct a due diligence on system design, code size, technologies and code complexity
  • Understand contractual obligations of software licensing
  • Analyze and understand the effort and impact of maintaining software and its code
  • Ensure that the software is modifiable and can be changed in future
  • Identify dependencies on any other third-party component
  • Understand the competency of the technical team and analyze the history of software product evolution
  • Conduct a deep analysis of Infrastructure and architecture of the underlying software, including network, data, software and hardware systems, platforms and tools.

Opportunities to Grow

Acquiring a good software or technology company is not enough by itself. An investor typically aims for a certain ROI, so the firm must have the potential to increase sales and profitability. That requires a well-oiled end-to-end sales and delivery machinery.

There is a need, therefore, to conduct a due diligence of target company.

The following needs to be carefully analyzed:

  • Conduct due diligence on sales effectiveness. Understand how the sales team is organized, incentivized and given the right ammunition. Slice and dice the numbers to see the areas that are driving growth vs areas that are lagging behind. Does the team have effective sales and presales support?
  • Account Mining Effectiveness – Similar to sales effectiveness, analyze if your team is equipped with account mining techniques and knows how to convert opportunities to wins. The ability to cross-sell, up-sell and mine customer accounts is the key for growth.
  • Market Expansion – Does the acquired company have the right team and know how to expand into various markets? Are they geared to build alliances and construct deals? The ability to research, identify the right partners and sustain growth is going to be key for expansion.

We live in a world that is increasingly competitive. Deals, acquisitions, and divestures are only going to increase in volume and complexity. Just a look at the count of PE and VC firms is an indication of the growth in the M&A sector. And the number of technology companies are increasing exponentially.

Good due diligence practices are critical before making any important investment decision.

So, have you done yours?