What is Technical Due Diligence (aka Technology Due Diligence)

Understanding buy-side and sell-side IT due diligence in M&A

    What is technology due diligence?

    Technology due diligence, aka IT or technical due diligence, is the analysis of the technology products, architecture, and processes of an organization. It is an important type of due diligence in M&A.

    Here, we’re going to discuss the basics of technology due diligence, how long it takes, and exactly what information needs to be scrutinized. We even provide a checklist so you can be totally ready, whether you’re buy-side or sell-side. 

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    What is included in technology due diligence? 

    IT due diligence, or technology due diligence, involves auditing a company’s IT infrastructure and processes (frequently with a focus on security assessment). This aspect of M&A due diligence allows the acquiring company to evaluate existing IT structures and identify any potential security risks. 
    So, this could include review of: 
    • Technical debt

    • Software licensing

    • Open source components

    • Technical risks

    • Cybe security testing and compliance

    • How sensitive data is managed and protected

    • System architecture

    • Technology budgets and spending

    • Onboarding
    Technology due diligence can (and should be) performed on any company. However, it becomes even more important when performed on a technology company - especially when there may be an entire software development team and many more technical processes involved.  

    Technical due diligence sell-side

    In mergers and acquisitions, we generally think of the buyer performing due diligence. However, the company that is being acquired must also do their due diligence. Why? Because half of all deals fail due to issues surfaced during the due diligence process. If the sell-side can perform due diligence on their own company first, issues can be identified and rectified before any buyer gets involved.

    The result for the buyer is a more streamlined, less frustrating process. For the seller, it often equates to a higher value deal.

    Technical due diligence buy-side

    For the buyer, technology due diligence is an important step on the road to peace of mind during an M&A deal. A thorough understanding of the target's IT capabilities, technology products, data protection, and internet security is essential in today’s digitally-driven business world.

    It’s about identifying major risks, current or future, that could impact the business; for example, security risks and legacy systems. It’s also an opportunity to look on the positive side for any unique IP, tools and processes.

    Because of the sensitive nature of this information, the buyer and seller will need to share documents in a secure data room.

    How long does the technical due diligence process take?

    In general, expect to spend about 1-2 months in due diligence. This is usually enough time for the buyer to complete a thorough evaluation of the business, including the technical aspects.

    However, if the seller goes into the deal unprepared, the process can drag on. This is why always-on readiness, achieved with the right preparation and tools, is essential to a successful deal.

    Technology due diligence checklist

    Our technology due diligence checklist covers everything you need to prepare or review (depending on whether you're buy or sell-side) during M&A.

    If you’re the seller, our advice for a seamless due diligence process is to prepare well in advance of your business exit. There's a huge amount of information to get ready and wasting potential buyers' time will not result in the best outcome. However, if you are selling a business in a hurry, Ansarada Deals is your best solution.

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    How do you perform due diligence in technology?

    • Review your own IT infrastructure 
    • ID the target company’s IT systems
    • Collate technology vendor contracts & details
    • Assess the target company’s IT team
    • Review their technical maintenance processes
    • Evaluate their data and cyber security

    How do you prepare for technical due diligence?

    The best way to prepare as the the target company is to perform technology due diligence on your own business in advance. This will enable you to identify issues and gaps before the acquiring company encounters them.  

    Why is technical due diligence important when buying a business?

    Technical or technology due diligence can identify IT gaps, inefficiencies, and potential cyber security issues that could arise when different IT networks combine as part of a merger or acquisition.