“Are we getting a good deal?”
“What can go wrong here?”
“Can this company we’re about to buy scale?”
Those are the questions M&A due diligence aims to answer. But it’s only by diving into a company’s technology infrastructure that investors are truly able to understand what it is they are buying.
For that, you need a technical due diligence report that assesses a company’s technical maturity, development practices, tools, people and processes.
Technical due diligence can highlight security risks, and it can offer a glimpse into the future success of a company. This is the kind of assessment that can identify whether a company is using scalable development practices and tools that support future growth. In the case of mergers, assessing development practices can also identify how complex merging both IT architectures will be and whether cost savings can be achieved.
Despite the value of this form of due diligence, many investors still don’t understand what to expect from a due diligence report. Let’s change that. In this article, we’ll cover what a good technical due diligence report should look like, what it covers and how long it takes.
What Does a Technical Due Diligence Report Cover?
A technical due diligence report assesses the technical maturity of an organization. In general, the more mature a company’s tools and processes, the better the technology.
The assessment will look at how the tools and processes work together. It’s useful to look at them through a variety of lenses, too. At Kingsmen Software, for instance, we have designed a maturity model that looks at the following disciplines:
- Version control.
- User experience management.
- Program and project management.
- Requirements management.
- Application development.
- Project portfolio management.
- Work item management.
- Test defect management.
- Release management.
Within each discipline, we analyze the people, the processes and the tools involved. This allows us to identify where a company’s technical strengths and weaknesses lie.
Take version control, for instance. To identify how mature a company is when it comes to version control, we might sit down with their development team and ask:
- What tools do they use to version their code?
- What is their process for getting that code to a repository like GitHub?
- Who is responsible for this process?
Knowing all of this will tell us a lot about a team’s capacity for creating and delivering new products or features. “Teams that use version control are more likely to have mature processes for cloud native development practices, such as continuous delivery,” says Dan Isla, vice president of product at itopia.
“This is because teams using version control can reproduce any environment automatically, access historical environments and query the versions of each library or dependency used by older applications and legacy code.”
From there, we can return to our model and begin discussions regarding the user experience management team, then program and project management, and on down our list.
How Is the Information in the Report Gathered?
Interviews with the existing development team are the primary way we gather information during technical due diligence, but it’s far from the only one.
We also request access to codebases and tools, and ask developers to walk us through their processes. The more you poke around and dive into the nitty gritty, the more meaningful questions you’ll be able to ask.
Ultimately, that will make for a more insightful report. That’s the final stage of the technical due diligence process, says the team at cybersecurity company Synk: distilling everything you learn from code reviews, executive interviews and conversations with stakeholders into a detailed report.
How Long Does a Technical Due Diligence Report Take?
The average technical due diligence report will take around three weeks to complete. At Kingsmen, for instance, we typically spend two weeks interviewing the target company and analyzing their processes, then one week putting together a report.
Three weeks may feel like a long time, but it’s well within the time frame of most deals. Gartner reports that close times grew significantly over the course of the last decade, by about 30 percent. By 2019, deals were taking nearly 40 days to complete. Expect that number to keep growing in the coming years.
Bigger deals take even longer. According to WTW’s Quarterly Deal Performance Monitor, most of the high-value deals ($100 million and up) that took place in Q1 or Q2 of 2022 took more than 70 days to complete.
So, the three weeks you spend on in-depth technical due diligence are unlikely to hold up your deal. If anything, the results of a three-week technical audit could change the way you approach the deal moving forward.
Armed with information about the technical maturity of the target company, the risks you face and the potential to scale, you can move through the rest of the deal process more quickly and with more confidence.
What Will a Finished Technical Due Diligence Report Look Like?
Some investors who receive technical due diligence reports can be frustrated by a lack of context. Reports need to reflect the investors’ initial objectives if they are to drive real value.
Far from being a list of technical observations, a good due diligence report should offer insights tied to the deal, say Bain’s Hank Chen, Jonny Holliday and Robert Pierce. “Investors often complain that the tech report they get back from the diligence team is a list of observations, not a set of contextual insights,” they explain. “It is often brimming with tech jargon that may or may not be relevant to the deal thesis or investment decision. Strong tech diligence has to be tied to the deal thesis from the outset; it is no different from commercial diligence in this respect.”
At Kingsmen, we strive to create reports that are as in-depth and insightful as our assessments. A typical report will include the following features:
- An executive summary highlighting key insights and takeaways.
- A three-year road map of recommended improvements.
- An overview of the framework we use to conduct analysis.
- A detailed heat map that shows risks and maturity levels for each discipline across our people, process and tools framework.
- Detailed notes on the maturity of each discipline.
If applicable, we will also outline the next steps you need to take and how we can help.
How In-Depth Should the Report Go?
One thing to bear in mind is that reports must be tailored to the client in question, as well as to the deal. Some investors will want the nitty gritty technical details, but most won’t.
The team at DealRoom recommends highlighting key insights rather than including everything. Going too far into detail can be “a waste of time as the executives reading your report will not have the time to work through such a cumbersome text,” they write. “Focus on your company’s objectives (why is it engaging in M&A?) and the objectives of the report.”
At Kingsmen, our reports are designed to cater both to those who only want the highlights and those who wish to dive deeper into technical analysis.
Our reports start with an executive summary that reiterates investment objectives and presents our core recommendations in the short- and long-term. This is followed by a three-year road map, which shows at a glance how these recommendations can be implemented, as well as a series of heat maps that highlight the maturity of the target company in numerous areas.
Those looking for top-level insights need only read the first five or so pages. Those looking for more in-depth analysis will find dozens of pages of concise notes on individual technology disciplines.
You don’t have to read the due diligence report front to back to get the insights you need to make a decision, but the details are there should you need them.
The Importance of Working With an Expert
It’s essential to work with a specialist on due diligence reports. For a due diligence report you can trust, turn to Kingsmen Software. Our deep industry knowledge, experience and frameworks allow us to perform a comprehensive audit of any investment. Further, we can assist with road mapping and software development if required.