Technical due diligence may be a vital part of the due diligence process, but that doesn’t stop some companies from undervaluing it or skipping it completely.
Failing to accurately assess a target’s technology, infrastructure and processes can be catastrophic and completely derail investments. Want specifics? Here’s what you miss by forgoing thorough due diligence.
Additional Development Costs
Technical due diligence evaluates the quality of a company's existing software as well as its people and processes. It gives you the chance to identify poor quality code or inefficient software development processes that can result in significant costs further down the line.
In many cases, the acquiring business will be forced to spend significant money fixing existing software issues before it can begin to scale its investment. Had technical due diligence been in place, the team could have accounted for the size of critical development costs during negotiations — or pulled out of the deal completely.
Slow IT Integration
In cases where investors are looking to integrate the target company’s infrastructure with their own, a lack of technical due diligence could increase costs and hamper productivity.
“It’s not uncommon for companies to take longer to realize ROI due to failed or extended integration of operations and technologies,” says Geeman Yip, founder and CEO of BitTitan. “Disjointed IT integration can impede workflow and processes between the two M&A entities, as well as put business goals at risk.”
The problem is infrastructures can vary tremendously between two companies, both in terms of quality and composition. “If a technology deficit exists and isn’t thoroughly assessed, it will result in costly resource allocation and hours devoted to modernizing technologies and unifying the IT infrastructure.”
Security, Compliance and Legal Issues
It’s not just code quality that acquiring companies need to examine. Due diligence also uncovers security, regulatory and legal risks.
For example, a lack of cybersecurity measures could create security issues that risk financial and reputational damage, says Frank Wanicka, CTO and Partner at Kingsmen Software.
Code sets could also infringe intellectual property rights by misusing third-party code — an increasingly common problem given the rise of third-party software — and thus create a legal issue that the acquiring company would be liable for.
Failure to Profit on Your Investment
Most acquisitions are made with an eye to future growth. When the code base needs to be revised, or when there are integration issues, or when there are compliance issues, the buyer’s own growth goals are compromised.
Often, issues that could prevent companies from hitting their growth targets get made obvious with a thorough due diligence process, says Bill Clerici, CEO and Partner at Kingsmen Software. When acquiring companies discover such issues, they are able to renegotiate or back out of deals with minimal financial loss.
But there are no refunds in M&A. Forgo due diligence and risk your investment.
Protect Your Downside
The cost of a technical due diligence report is far outweighed by the potential costs. Whether that’s the cost that comes with rebuilding the code base, missing growth targets or responding to lawsuits, there's simply no reason to risk it.