3 Main Reasons Technology Due Diligence Matters in M&A
A technology due diligence is an unavoidable part of any merger and acquisition (M&A). Yet, for some reason, many buyers and sellers do not give it as much attention as they do with financial, legal and operational due diligence.
Perhaps it is because it rarely reveals any deal-killing information. But still, it can save your company a few thousand pounds during negotiations and a world of problems post-deal.
In this blog, we will discuss why technology due diligence matters in M&A. But first, let’s get the definitions out of the way.
What is Technology Due Diligence?
Put simply, technology due diligence is the examination of technology products, architecture and processes within an organisation. Some experts will also call it IT/technical due diligence or technology risk assessment. These terms all refer to the same thing.
It is a process that gauges the technological capabilities, weaknesses and overall health (tech-wise) of a company during M&A.
What Does Technology Due Diligence Involve?
Before we get into what it involves, who should perform a technology due diligence?
Many people assume it is just the buy-side (buyer) that should perform an IT due diligence. But, in reality, both the buy-side and sell-side (seller) can benefit from the process.
For the buyer, it is quite obvious why you need to understand the technological strengths and weaknesses of the target company: for better negotiations. On the other hand, the seller should also carry out the process to identify and rectify issues before the buyer comes in. But for both the seller and buyer, a thorough IT due diligence can significantly reduce the risk of the deal failing.
So, What is Included in Technology Due Diligence?
An IT due diligence (as an assessment) will focus on a variety of items. A typical due diligence checklist for investors will include the following:
- Software and product architecture
- Intellectual property and licensing
- Cyber security and data protection
- Compliance assessment
- IT operations and integration readiness
Although these are the main items, your checklist should not be limited to just the six. You can add other tech-related entities you deem essential for the M&A to succeed.
You can perform a technology due diligence on any company (in fact, you should) before finalising an M&A. But, this process becomes even more important if the company in question deals in technology.
Importance of Tech Due Diligence for M&A
Risk Mitigation
One of the main benefits of IT due diligence is risk mitigation. As mentioned, it allows the investor to identify potential risks and vulnerabilities. And, with such a wealth of information, they can make better decisions, like whether or not to go ahead with the deal or what to handle first once the deal is done.
Better Negotiating Position
In addition to reduced risk, a thorough tech due diligence strengthens your negotiating position. For instance, if you are a buyer, having an accurate picture of the company’s tech gives you better leverage at the negotiating table (because you know exactly what you are buying).
In fact, research by Pitchbook indicates that discoveries from due diligence can save the buyer up to 30% of the final sale price.
On the seller’s end, a tech due diligence helps you understand exactly what you are selling. Which means you will know the amount to ask for during negotiations.
Value Assessment
One of the main purposes of a technology-based due diligence process is to get a comprehensive view of what the technological assets are worth. But why do you need to know the worth?
Obviously, knowing the worth of what you are buying makes it easier to negotiate the purchase price. But, most importantly, it reveals potential risks and hidden costs that could affect the value you get from the deal. In simpler terms, knowing the correct value helps you avoid surprises and maximise the return on investment.
Conclusion: Partner With a Professional
Technology due diligence is a complex process, considering it involves evaluating technology (that requires expertise in things like software, infrastructure, cybersecurity, etc.). That is why it is always advisable to partner with a professional. Working with an expert can not only save your time but also improve the chances of success of the whole process. That is because they are thorough, efficient and have the expertise to align the procedure with your goals.Â
