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Determine the scope of the Tech Due Diligence

The first step in conducting a tech due diligence is to determine the scope of the Technical Due Diligence. This involves understanding the business goals of the software company, the type of software they develop, and the technologies they use. This information will help you identify the areas that need to be reviewed during the Due Diligence process.

Review the software code and infrastructure

Once you have determined the scope of the Tech Due Diligence, the next step is to review the software code and infrastructure. This involves examining the software architecture, the software source code, the coding practices, the development processes, and the deployment practices of the software company. It is also important to review the infrastructure that supports the software, including the servers, databases, and networks. 

The purpose of this step is to identify any potential vulnerabilities or weaknesses in the software code and infrastructure. These can include security flaws, performance issues, scalability challenges, and compliance risks. It is also important to assess the overall quality of the software code and infrastructure to ensure that it is reliable and maintainable in the long term. 

Evaluate business alignment and legal compliance

Conducting a comprehensive tech due diligence requires a multifaceted approach that goes beyond assessing the technical capabilities of a company's technology stack. It is essential to analyze how well the technology development aligns with the business objectives to ensure that the technology is delivering value to the organization. Additionally, evaluating any compliance issues arising from the company's intellectual property portfolio is critical to avoid potential legal disputes. This includes assessing the strength of the company's patents, trademarks, and copyrights, and identifying any potential infringement risks. GDPR regulations in Europe also need to be considered, as compliance with these regulations is crucial to avoid hefty fines and legal issues. A thorough review of the company's data management practices, including data privacy and security measures, is therefore essential.

To wrap things up, conducting a Tech Due Diligence on a software company is a must-do process for lawyers and investors alike when making investment decisions. Usually, this is done by an outside specialist who can give an unbiased, detailed, and contextualized analysis. If you want the full picture when it comes to understanding the technology, make sure to choose a provider that includes an automated code scan as part of their Tech Due Diligence solution. That way, you'll get a complete 360 degree view of what's under the hood. 

By following the process outlined in this article, you can ensure that your Tech Due Diligence process is thorough and effective, delivering the critical information to validate your decision to invest in a given technology infrastructure. It's important to keep in mind that a Tech Due Diligence done right can help you steer clear of costly mishaps and move you towards investing in structures that could have greater potential for growth.

Although OSS can bring significant benefits and save a lot of time, it can also come with potential risks that may have a high financial and legal costs.

One of the primary risks associated with OSS is the possibility of violating intellectual property (IP) rights. It is therefore fundamental to ensure that the audited organisation has proper processes in place to control and regulate the use of open-source software internally and ensure this usage complies with the license's T&Cs.

Many OSS licenses have specific requirements that must be followed, such as providing attribution or making any modifications to the open-source component available to the public. Failure to comply with these requirements can result in lawsuits and costly fines. A well-designed Tech Due Diligence will thus include an analysis of the open source and other third-party licenses used by the company and an assessment of whether they are complying with all requirements. The results of this due diligence will be even more insightful if the process includes a source code scan, able to identify all the open-source and third-party software in use in the source code.

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Marine is our Marketing Director. She is a branding and brand activation specialist with international experience in BtoB and BtoC.

Marine Yborra

As a Tech Investor looking to invest in a software company, or an M&A lawyer managing this investment process, performing a Tech Due Diligence is crucial to ensure that you make a sound investment decision. A Tech Due Diligence process involves a comprehensive review of the software company's technology stack, including its software code, systems, infrastructure, and intellectual property. In this article, we will guide you through the process of conducting a Tech Due Diligence on a software company.

Are you looking to invest in a software company? Learn how to conduct a thorough tech due diligence process to ensure your Tech investment is secure. Our guide for legal and tech professionals covers everything you need to know.

How to Perform a Tech Due Diligence on a Software Company: A Guide for Legal and Tech Professionals

How to perform a Tech Due Diligence on a Software Company

What is Technology Due Diligence in mergers and acquisition? 

Technology due diligence in M&A is an in-depth evaluation of the target company's technology stack, operational infrastructure, and ability to scale. This process scrutinises the scalability, maintainability, and integration potential of the target’s systems, identifies vulnerabilities such as technical debt or unlicensed software, and evaluates compliance with intellectual property and regulatory requirements. Further, it provides clarity on how well the target’s technology supports its value proposition, aligns with growth projections, and fits into the acquirer’s broader strategic framework. By uncovering latent risks and synergies, technology due diligence directly informs valuation, post-acquisition integration planning, and risk mitigation strategies. 

Key areas in technology due diligence include: 

A comprehensive evaluation of a target company's software ecosystem, focusing on proprietary software, open-source components, third-party licenses, and mission-critical dependencies. This includes evaluating the technology stack, scalability, and flexibility to ensure they meet both current and future business needs. Investors should also investigate technical debt, software lifecycle management practices, and the risk of vendor lock-in. 

Key questions include: How well-documented and modular is the codebase? Are there significant reliance points on unsupported or outdated technologies? 

A robust assessment of the IT infrastructure encompasses hardware, networks, data centers, and cloud solutions. This involves benchmarking performance, reliability, and scalability against industry standards while identifying single points of failure. Investors should also evaluate operational redundancy, infrastructure costs, and the integration feasibility with existing systems. Metrics such as uptime, latency, and disaster recovery readiness are vital for gauging operational stability. Additionally, cloud contracts and vendor SLAs should be reviewed for flexibility, termination terms, and hidden costs. 

Examining the company’s cybersecurity measures, protocols, past incidents and risk management strategies. This includes evaluating the accuracy of data encryption, access controls, penetration testing history, and incident response protocols. Due diligence should uncover potential compliance gaps, such as GDPR violations or industry-specific standards (e.g., HIPAA, PCI DSS). Investors must weigh the financial and reputational impact of prior breaches, ongoing vulnerability exposure, and the resources required to achieve a secure posture post-acquisition 

Verifying the ownership and protection of the target company’s intellectual property, including patents, trademarks, and copyrights. This confirms whether the target has exclusive rights to its technology, reducing risks of IP disputes or infringement claims.

Assessing the technical team goes beyond reviewing resumes – it involves understanding the team’s ability to support the business’s growth and innovate under pressure. This includes analysing the organisational structure, succession planning for key roles, and the cultural fit of the team within the acquiring organisation. Metrics like tenure, turnover rates, and development velocity provide insights into team stability and productivity. Investors should also consider retention strategies for critical personnel, as their departure could jeopardise the continuity of key projects. 

Technology due diligence equipes buyers with a granular understanding of whether the target’s technology aligns with strategic objectives. Beyond identifying risks, it highlights operational synergies, integration challenges, and areas requiring investment for value creation post-transaction. It provides actionable insights that shape not just the deal terms but also the integration roadmap and long-term ROI. 

Why is Technology Due Diligence so important in M&A? Benefits for an investor

Technology Due Diligence holds immense significance in the context of M&A transactions. It serves as a comprehensive evaluation of the target company's technology assets and provides critical insights that directly impact the success of the deal. At Vaultinum, 97% of CIOs have seen Tech Due Diligence which include OSS scans uncover issues or opportunities that made a material impact on the deal (source: Vaultinum). 

Let's delve deeper into why Technology Due Diligence is essential in the M&A process. 

In any M&A transaction, it is crucial to assess whether the target company's technology aligns with the buyer's strategic objectives. Tech Due Diligence helps evaluate the compatibility of systems, software, and infrastructure, ensuring that the acquired technology supports the buyer's long-term goals. It provides a clear understanding of the technological capabilities and limitations of the target company, allowing buyers to determine whether the technology can be integrated seamlessly into their existing operations.

The Technology Due Diligence process helps uncover potential risks and liabilities associated with the target company's technology assets. This includes identifying any legal or regulatory issues, intellectual property disputes, security vulnerabilities, or compliance shortcomings. By thoroughly assessing these aspects, buyers can gauge the potential impact on their business operations and make informed decisions about risk mitigation strategies or renegotiating deal terms. 

Evaluating scalability, maintainability and future-proofing

Technology Due Diligence provides insights into the scalability and future-proofing of the target company's tech assets. It allows buyers to assess whether the technology can accommodate future growth, handle increased transaction volumes, or adapt to changing market demands. Understanding the software scalability and maintainability of the technology infrastructure is crucial for making investment decisions that align with the buyer's long-term business objectives. 

Effective Tech Due Diligence goes beyond risk assessment and highlights potential synergies and value drivers. It helps identify intellectual property assets, proprietary algorithms, or unique functionalities that can enhance the buyer's competitive advantage or create new revenue streams. Uncovering these synergies enables buyers to negotiate better terms, maximise the value of the deal, and gain a competitive edge in the market. 

One of the critical aspects of M&A deals is the successful integration of technology systems and processes. Technology Due Diligence provides valuable information about the target company's IT infrastructure, applications, and data management practices. This knowledge allows buyers to develop a comprehensive integration plan, anticipate challenges, and ensure a smooth transition post-acquisition. By understanding the complexities of technology integration beforehand, buyers can minimise disruptions to operations and maximise the efficiency of the combined entities. 

A thorough review of the target’s technology provides insights into its actual value, enabling investors to make a more informed valuation. This process evaluates the maturity, scalability, and uniqueness of the technology stack, uncovering hidden costs such as technical debt, outdated infrastructure, or unplanned upgrade expenses. Investors can identify whether the technology provides genuine competitive differentiation or if its perceived value is inflated by marketing narratives. This level of scrutiny prevents overpaying for assets that may require significant investment to meet strategic goals. 

A clear understanding of the target’s technology roadmap, innovation pipeline, and R&D initiatives, empowers investors to align acquisition decisions with their strategic objectives. Beyond assessing the target’s current capabilities, this review determines whether the technology supports future scalability and innovation. Key considerations include the feasibility of integrating the roadmap into the acquirer’s vision and the alignment of R&D priorities with emerging market trends. Investors gain actionable insights into whether the target’s technology offers a path to sustainable growth or requires a pivot to remain competitive. 

Identifying technical vulnerabilities, inefficiencies or compliance gaps in the due diligence process provides leverage for negotiating favorable deal terms. Investors can push for price reductions, deferred payment structures, or indemnities to address pos-acquisition risks such as cybersecurity remediation, intellectual property disputes, or technical upgrades. By quantifying these risks, investors gain a stronger position at the negotiating table, ensuring that contingencies are built into the deal to safeguard long-term value. 

For tech-driven acquisitions, understanding the target’s technology capabilities reveals whether it possesses unique differentiators that can sustain market leadership. Investors should evaluate how well the target’s innovations align with current market demands and whether the company has a clear runway for future development. This knowledge provides confidence in the target’s ability to maintain its competitive edge and drive long-term returns. 

In summary, Technology Due Diligence plays a pivotal role in M&A transactions by providing a thorough assessment of the target company's technology assets. It helps buyers evaluate strategic fit, identify risks and liabilities, assess scalability, uncover synergies, and plan for integration. By partnering with a trusted specialist like Vaultinum and leveraging its code scan solution, buyers can gain confidence in their investment decisions, mitigate risks, and optimise the value of their M&A transactions.

How to perform technology due diligence in M&A? 

Technology due diligence follows a structured sequence of steps designed to uncover risks, synergies, and integration challenges while aligning the target’s technology capabilities with the strategic objectives of the deal. 

The first step is to clarify the scope of the due diligence based on the buyer’s strategic priorities. This involves understanding the role of technology in the target’s business model, identifying key areas of concern (e.g., scalability, IP ownership, or cybersecurity), and aligning the analysis with the buyer’s post-acquisition plans. This strategic alignment ensures that the evaluation focuses on the most critical aspects of the technology landscape. 

Assessing infrastructure, data security, and IT systems 

An initial review establishes a baseline understanding of the target’s technology landscape. This involves mapping out core systems, reviewing architectural documentation, and identifying potential red flags such as outdated software, technical debt, or scalability bottlenecks. Initial discussions with the target’s technical leadership are critical for identifying priorities and clarifying the role of technology in the business model. 

Evaluting key assets and integration feasiblity 

The final stage involves a detailed analysis of the target’s core technology assets and assessing how they align with the acquirer’s existing systems and strategic goals. This includes: 

Reviewing the health of the technology stack, scalability, and maintainability. 

Verifying IP ownership and compliance with open-source licenses. 

Analysing IT infrastructure and cybersecurity readiness, including disaster recovery and compliance with regulatory requirements. 

Determining the compatibility of technology systems for smooth post-acquisition integration. 

What are the risks of ignoring Technology Due Diligence? 

Overlooking technology due diligence in M&A deals can result in unforeseen challenges that jeopardise the success of the transaction and the acquiring company’s long-term goals. 

Without a thorough understanding of the target’s technology, the acquiring company risks interruptions to core business operations. Critical systems may fail to integrate or may experience downtime, causing delays and operational inefficiencies. 

Unaddressed technology risks can lead to financial losses through unexpected costs for system upgrades, cybersecurity breaches, or compliance fines. Additionally, negative publicity from data breaches or failed integrations can harm the buyer's reputation in the market. 

Ignoring due diligence can result in mismatched systems and unprotected vulnerabilities, making the organisation an easy target for cyberattacks. Poor integration planning can delay synergies and weaken the combined company's strategic position. 

Examples of successful companies with effective Due Diligence practices 

Successful technology due diligence often determines whether a merger or acquisition delivers its intended strategic value. Here are two notable examples where technology assessments were pivotal. 

In 2018, Microsoft acquired GitHub for $7.5 billion. During the due diligence process, Microsoft assessed GitHub's platform scalability, security measures, and open-source community engagement. This thorough evaluation ensured that GitHub's infrastructure could integrate with Microsoft's Azure cloud services, enhancing Microsoft's developer tools and services.

Salesforce's $27.7 billion acquisition of Slack in 2021 involved a comprehensive evaluation of Slack's technological capabilities. The due diligence process focused on assessing Slack's platform scalability, security protocols, and integration potential with Salesforce's existing ecosystem. This meticulous assessment ensured that Slack's technology aligned with Salesforce's strategic objectives, facilitating innovation and operational synergy.

These cases underscore the importance of thorough technology due diligence in M&A, enabling companies to mitigate risks, unlock value, and establish a foundation for successful integration. 

Vaultinum's IT Due Diligence: mitigating risks with our code scan solution 

One critical aspect of Technology Due Diligence is the assessment of a company's codebase. Vaultinum's code scan solutions play a vital role in this process, offering an in-depth analysis of the target company's software and source code. By scrutinising the codebase, potential risks such as security vulnerabilities, compliance issues, or inefficient programming practices can be identified. 

Vaultinum's code scan solutions utilise state-of-the-art tools and methodologies to ensure a thorough evaluation of the codebase. Automated scans, manual reviews, and code architecture analysis are employed to provide a comprehensive understanding of the code's quality, maintainability, and potential risks. This detailed assessment allows buyers to make informed decisions based on accurate information, mitigating the chances of post-M&A surprises or costly remediation efforts. 

In addition to risk mitigation, Vaultinum's code scan solutions also help uncover potential synergies and opportunities. A thorough examination of the codebase can reveal intellectual property assets, proprietary algorithms, or unique functionalities that might contribute to the buyer's competitive advantage or future business strategies. By identifying these valuable components, buyers can negotiate better deals and maximise the value of their investments. 

Vaultinum’s Tech Due Diligence expertise 

Vaultinum's expertise in the legal and tech industry, combined with their extensive experience in conducting Tech Due Diligence, ensures that buyers receive a comprehensive and reliable assessment. Their code scan solutions not only save time and resources but also provide peace of mind during the M&A process, enabling companies to make informed decisions and mitigate potential risks effectively. 

In the realm of mergers and acquisitions, Technology Due Diligence is a critical component for success. Assessing the technological infrastructure, systems, and intellectual property of the target company ensures that buyers make informed decisions and mitigate potential risks. Vaultinum, with its advanced code scan solutions, plays a vital role in this process, enabling buyers to uncover risks, identify synergies, and maximise the value of their investments. By partnering with a trusted third-party specialist like Vaultinum, companies can navigate the complexities of Technology Due Diligence and pave the way for a seamless transition in M&A transactions. 

Philippe is the CEO of Vaultinum. An expert in new technologies and high finance, and after 20 years in the international fintech industry, Philippe now heads Vaultinum.

Philippe Thomas

In today's rapidly evolving business landscape, mergers and acquisitions (M&A) have become integral strategies for companies seeking growth, expansion, and competitive advantage. However, the success of these transactions heavily depends on thorough due diligence, especially when it comes to technology assets. Technology Due Diligence plays a pivotal role in M&A by providing a comprehensive evaluation of a target company's technology infrastructure, systems, and intellectual property. It offers invaluable insights that enable buyers to make informed decisions, mitigate risks, and unlock the full potential of their investments.

Explore the significance of Technology Due Diligence in M&A deals. Discover how Vaultinum's code scan solutions play a vital role in assessing tech assets.

Why technology due diligence is key in mergers and acquisitions (m&a)

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