For private equity and corporate transactions involving proprietary software, software due diligence is critical to assessing deal valuation and ensuring post-transaction value capture.
Assessing a company’s software product through competitive, functional, architectural, and development lenses offers buyers critical information and insight. This has benefits for both buyers examining a potential technology target and for sellers planning to exit their business.
How software due diligence benefits buyers and sellers
For buy-side transactions, technology company acquirers and custom core software purchasers alike should consider thoroughly assessing the potential value and risk associated with the software technology asset.
Buyers need to understand the competitive positioning of the product, the business functions it provides to users, how the technology achieves differentiation and functional support through its architecture and UI/UX. This is on top of confirming that the software is well-architected, scalable, supportable, well-documented, and secure.
Further, understanding how the product manager creates the product roadmap, prioritizes development efforts, spends time on maintenance/technical debt or customer-onboarding.
Moreover, understanding quantitative measures around code quality, technical debt, open-source and third-party license risks, and known security vulnerabilities will facilitate more informed decision making concerning potential remediation efforts and costs.
For sell-side transactions, ensuring that all of the above aspects are understood, well-managed, and properly communicated to potential buyers can help ensure proper valuation, decrease perceived risk against the roadmap and scalability, and increase the number of buyers who can move further into the bidding process by alleviating early concerns through proper communication.
