The competitive landscape of mergers, acquisitions, and investments is very risky. Any decisions made during these processes may set a future course of success or failure for a business venture. There is one key factor that will often determine the outcome of the deal at hand, and this will be the condition of the target company’s technology.
This is where Technical Due Diligence steps in. A recent study indicates that 62% of all mergers and acquisitions failed to realize their financial objectives due to insufficient technical due diligence, thus proving its importance.
Technical Due Diligence is basically a more detailed investigation or scrutiny of the technological assets of a company, like software, hardware, and the infrastructural framework, prior to any investments made in the company. It enables a company to analyze and recognize the weaknesses or risks that might affect the transaction’s success.
This inspection looks to define not only the existing challenges but also how the technology can best accommodate future expansion and adjust to shifting marketing dynamics with respect to the strategic objectives of the company.
What is Technical Due Diligence?
Technical Due Diligence is an exercise of detailed reviews. It essentially refers to the proper analysis of the technology and structure. It is the process a company follows to ensure it meets all the required standards, serving the intended purpose of acquisition or investment.
Therefore, it is a study led by professionals interested in risk, liabilities, and prospects for technical improvement.
Following the assessment, you get a full report that includes all the information concerning the solution’s current state and assumptions, possible risks, suggestions for improvement, and conclusions. The report may be complemented by a tech due diligence checklist that states the exact things that shall be viewed or considered.
Why is it Important?
Technical due diligence is very important because it helps one fulfill several critical purposes and has a direct impact on the success of mergers, acquisitions, or any investment. The most important envisaged benefit is the mitigation of risk by pointing out potential flaws of a technical nature, old systems, and other types of scalability challenges that may be detrimental to future stability.
An accurate assessment of the technical landscape in technical due diligence makes it possible for the valuation of the company to be done without overpayment or undervaluation.
Finally, technical due diligence will align the technology of the target company with the strategic goals of the acquiring entity, enabling easier integration and better long-term cooperation.
Additionally, technical due diligence prevents future legal complications from non-compliance by identifying compliance problems on data privacy, security, and industry-specific regulations, thereby protecting the acquiring company from future liabilities.
In its entirety, technical due diligence provides an overview of the technical risks and opportunities, thus helping to make informed decisions on executing successful transactions.
When to perform Technical Due Diligence?
Technical due diligence should be conducted early in the acquisition or investment process—most likely right after preliminary discussions and before any legally binding agreements are executed—to help detect red flags that may affect any go-or-no-go decisions relative to the continuation of the transaction. However, technical due diligence may sometimes have to be pursued beyond closing the deal to continue ensuring alignment and managing risk.
Technical Due Diligence Process:
The technical due diligence process is going to cover the following main constituents of work:
- Preparation and Planning: Scope, Objectives, Timeline. Prepare a team with the right qualifications and experience.
- Information Collection: All necessary documentation and data, as well as rights to access the systems of the target company. It includes the source code, architecture diagrams, policies on security, and so on.
- Interviews and Discussions: Talk to key technical personnel to understand the technology stack, the development process of the company, and the prevalent challenges.
- Analysis and Assessment: Analyzing the technology structure, software development practices, scalability, security aspects, and alignment with industry best practices.
- Risk Identification and Reporting: Reporting the identified technical risks that are possible or potential challenges. Prepare a detailed report on the findings, risks, and suggestions.
- Recommendations and Next Steps: Now, to address the problems identified, provide concrete recommendations and actions on how to realign the current technology with business strategy.
Who conducts Technical Due Diligence?
Technical due diligence is normally performed by a separate team with deep technology, cybersecurity, software development, and industry regulations domain expertise. It can be staffed by internal expertise, external consultants, or a mix. Very often, the buyer hires independent firms specialized in technical due diligence so that the process of assessment is unbiased and pervasive enough.
Technical Due Diligence Checklist
This checklist ensures that every facet is suitably appraised:
Technology Stack Appraisal:
- Identify the programming languages, frameworks, and other tools in use.
- Ascertain the maturity and scalability of the technology stack.
Software Architecture:
- Analyze the architecture for flexibility, scalability, and industry best-practice alignment.
- Evaluate the manner in which architectural decisions are documented and maintained.
Code Quality:
- Conduct a code review for quality, readability, and adherence to standards.
- Identification of technical debt or legacy code problems.
Security:
- Review security features in place: encryption, access controls, and vulnerability management.
- Check on the history of security incidents and how they have been handled.
Compliance:
- Check that it conforms to industry requirements on data protection and privacy rules.
- Examine policies in place with respect to data protection and privacy.
Infrastructure and DevOps:
- Evaluate the setup infrastructure, including cloud services, hosting, and disaster recovery plans.
- Assess DevOps practices, CI/CD pipelines, and automation.
Team and Processes:
- Review the skills, experience, and structure of the technical team.
- Analysis of software development processes, including Agile or DevOps methodologies.
Scalability and Performance:
- The system can be checked for its ability to scale and support increased loads.
- Performance metrics should, therefore, be reviewed to identify bottlenecks.
Intellectual Property:
- The ownership and licensing of critical technology and software should be validated.
- The risk of intellectual property infringement should be assessed.
How can VisionX help?
At VisionX, we believe that large transactions, such as investments or mergers, usually require proper technical diligence to ascertain their long-term effects on your business. This is why we offer an extensive suite of services designed to support you throughout such a process.
Our technology consulting services address enterprise infrastructure overview and strategic road mapping, together with risk mitigation, to focus on helping you assess your current technological capability and identify gap areas. We also focus on ensuring that digital transformation and cost-effective solutions work in unison with business goals.
Most importantly, our quality assurance services will ensure defect prevention, efficient performance, and the standard quality conformance of the industry, and all these add up to ensure a neutral position for your products and services.
Right decisions based on the understanding of the clear technology landscape and possible risks give your business the potential to make a difference in a competing environment, empowering your business with VisionX.
Final Thoughts
Technical due diligence is important in the acquisition or investment process. It involves an in-depth review of the target company’s technological underpinning, providing vital insights.
This assessment goes beyond current technology capabilities. It will inform buyers about potential risks, such as outdated infrastructure, scalability issues, or security vulnerabilities. These factors could hinder the success of the investment or acquisition. This would provide stakeholders with early insight into the risks in developing control measures and ensuring the technology remains relevant while supporting future growth.
Also, technical due diligence further assures that the technology the target company uses will support the strategy set in place by the acquiring company or the investor. This is important for integration without friction, operation efficiency, and attainment of long-term business goals.
Those organizations that know the right time to perform technical due diligence and how to do it can reduce risks, identify opportunities, and maximize their investments. Ensuring technical elements align with the strategic goals is critical since it lays the foundation necessary for future success.
