Technology can make or break a deal. In the digital age, every company has technology at its core in some way, shape or form. It may come in the form of technical products or services, IT systems and architecture, intellectual property, code and data quality or cybersecurity.
An asset with strong financial performance and plenty of growth opportunities may appear great on the surface. However, it happens all too often that potential investors peel back the layers and find technical problems that make them think twice about the deal. Without a solid technical foundation, an asset is more likely to be viewed as a risk.
Around half of deals fail during the due diligence phase as firms uncover problems that the seller did not disclose. Typically, this doesn’t happen because a seller has been dishonest. Instead, it is usually the case that they did not know what information to disclose, or they were not aware of the problems in the first place.
Before we delve deeper into why technology and IT diligence are necessary, let us explore what it involves.
Technology and IT Diligence: What Does It Involve?
Because technology and IT blunders have the power to sink a company, firms conduct technology and IT due diligence to ensure asset technology is up to scratch before proceeding with the sale. But what does this involve? Typically, the firm will assess the target asset’s IT capabilities, data protection, internet security and technology products in-house or with the help of a third-party technology due diligence expert.
On the sell-side, assets can identify and fix any technical problems before a potential buyer conducts their own due diligence. On the buy-side, the buyer conducts technology due diligence to ensure there are no glaring technical issues that could cause future problems. Conducting technology due diligence allows the investors or buyers to get a clear view of a company’s true value and the potential for risks and growth, considering factors such as technological processes, external market forces and risks from third-party software.
Because all companies are technology companies to some extent, all companies on the buy and sell-side should conduct technology due diligence. However, it isn’t a simple process. As a result, many firms will enlist the help of technology due diligence experts, who will uncover any existing technical problems that may jeopardise the sale. Vitally, the technology due diligence expert will lay out their findings in a comprehensive report, allowing buyers or sellers to assess the technical competency of the asset.
Why is Technology and IT Diligence Necessary?
Unfortunately, some firms still view technology due diligence as a box-ticking exercise, meaning assets may not be properly assessed before a deal, opening firms up to risk. However, strong technology due diligence impacts opportunity and risk across several key business areas: product evaluation, technology and architecture, data and analytics, cybersecurity, organisation and development processes and technology benchmarking and scalability.
Additionally, conducting technology due diligence allows organisations to organise relevant documentation to speed up the sale process and avoid any legal problems, from unlicensed software to intellectual property infringements.
However, with technology due diligence, the type of asset will determine where the main focus lies. For example, a software company might focus on intellectual property and custom development, whereas a SaaS company might place more emphasis on exploring the right use of a stack. Additionally, commercial tech-enabled companies need to ask the right questions such as ‘are there risks of downtime which will lead to loss of revenue and customers?’ and ‘is there a proper back-up system in place?’
The Onefourzero Technology and IT Due Diligence Process
The onefourzero technology and IT due diligence process helps buyers validate buyers’ investments using an easily digestible red flag rating system that identifies risks and opportunities in assets.
The process starts with management interviews. During the interview, we will ask you several questions about your firm’s technical capabilities to gain insight into the inner technical workings of the organisation.
After interviewing all the relevant management stakeholders, we will analyse your firm’s technical capabilities in more depth. We will look under the hood into a target’s cybersecurity, risk and compliance management, and IT architecture/infrastructure. Once we have completed this process, we will rank each category in a red flag rating system which indicates whether further action needs to be taken.
Finally, we will outline key observations and findings clearly and succinctly. We will also make several key technical recommendations ranked by urgency. For example, suppose our investigation finds that your firm’s IT security and cyber security are lacking in some way, we will recommend actions that can be taken to remedy potential problems. Similarly, if we find that there are some issues with risk management and compliance, we would likely look deeper into your firm’s disaster recovery and business continuity planning strategies.
In Summary
Technology plays a vital role in value creation. For this reason, prospective buyers must have a clear understanding of an asset’s technology and IT capabilities before progressing with an acquisition. Unfortunately, up until recently, technology and IT operations were not given sufficient attention during the traditional due diligence process. As a result, some companies were exposed to risks they had not foreseen. Today, however, most companies recognise the necessity of conducting technology and IT due diligence on the buy and sell side.
