3 Benefits of Technology Due Diligence for Private Equity Assessments 

Continued focus on digital transformation as a business strategy has led to some of the biggest deals in the technology, media, and telecom sectors. The success of these deals lies squarely in technology due diligence.

As part of a larger investment strategy, technology due diligence for investments entails thoroughly examining a company’s technological resources. Risk reduction and value preservation are the objectives. Before you sign a contract or make a significant purchase, you can gain insight into essential details by “doing your homework” in this area.

You can’t make good decisions without understanding how the technology will fit within your business strategy, which is why conducting a thorough review of the company’s technology assets is so important.

What Is Technical Due Diligence for Private Equity Firms?

Private equity firms use a process called “technology due diligence” to evaluate a company’s technological capabilities. Before finalizing the deal, investors use this process to identify any potential technological risks and difficulties. Technology architecture, code, code security, and technical debt are among the things examined.

In reviewing the company’s technology infrastructure, private equity firms also consider its market position, industry trends, operational processes, and competitive landscape. This is because most private equity firms have limited resources – they can only afford to spend a little bit of time on research. Therefore, their due-diligence process needs to be as efficient as possible.

Additionally, due diligence helps identify:

• Product strategy  
• Assessment of personnel to determine resource needs post-acquisition  
• Processes and tools required to support the technology once the deal is completed  

Common Steps for Conducting Technical Due Diligence for Private Equity Deals 

The due diligence process is similar to other types of investments. For example, if you’re buying a house or car, you want to ensure it doesn’t have any significant issues before buying it. Technology due diligence is no different. It allows investors to make informed decisions about whether they want to invest in a company’s product or service. The most common steps when performing this review include the following:

Conduct a code scan

Maintaining and adding new features to low-quality software is difficult. Furthermore, it is costly because the investor may require additional resources to refactor the code, which impacts costs after the acquisition. A scan examines the code’s organization to see if it adheres to accepted best practices for high-quality code.

Align on business plan and vision

When conducting technical due diligence, you will undoubtedly come across some granular details that may seem trivial or irrelevant to the project at hand. 

However, in the world of technology, it is important to keep a sharp eye out for any potential issues that could come up later down the road and consider questions like:

• What goes into the go-to-market plan?
• What gives you the edge in the market? 
• What benefits does your product offer customers? 

Check all relevant documentation

Documentation is critical to understanding the current state of the technology. It’s all-important because it helps with maintenance after the acquisition. The following documentation should be reviewed:

• Architecture type, overall infrastructure
• Product integrations and APIs  
• Any tools or technologies used in product development (e.g., artificial intelligence (AI) and machine learning)  
• Security checks (how are you preventing security vulnerabilities?)  
• Adaptability and scalability (how will your product adapt to user needs; is it easily scalable in your industry/market)  

Report findings 

Feedback is given on all findings following internal meetings. A technical due diligence report should include the following:

• An executive summary that highlights the most important findings and recommendations
• Details about the company’s industry, including market size and growth rates
• A description of the company’s business model and strategy, including key risks and opportunities
• Information about the founders and management team (including experience level), as well as their compensation packages
• Information about key customers, partners, and suppliers

3 Benefits of Technical Due Diligence Assessments

Private equity firms are constantly on the lookout for potential investments. Due diligence assessments provide the necessary information to make sound decisions. To protect investors, comprehensive technology due diligence must be performed before investing.

Due diligence assesses the risk of investing in an entity or venture. It is used as a tool for investors to mitigate risk and evaluate whether an investment is worthwhile. Additional benefits included:

1. Reduces financial risk by identifying all gaps and pitfalls

Technical due diligence assessments consider all aspects of a business’s operations, including any legal issues or loopholes that might affect how the company operates. They also give owners and investors an overall picture of how well the organization is doing at this point and whether it has any warning signs that it may fail in the future and not be able to give any return on investment. 

By using technical due diligence assessments, investors and owners can improve their chances of avoiding unpleasant surprises later on and understanding exactly what they are getting into.:

• Security issues: Security defects in the code leaves the technology vulnerable to cyber attacks. A security review involves a code analysis to identify vulnerabilities, such as improper handling of sensitive information.
• Technical debt: When a company delays work, such as code changes, this leads to what’s called technical debt. Technical debt adds work, and thus costs, that will need to be completed. With proper due diligence, private equity firms can uncover these items to assess their risk. 
• Software licensing: Software licenses are an expense that must be accounted for in the deal. Private equity investors must ensure the company has legal rights to third-party software. Without legal rights to those tools, the investor could face legal issues.

2. Helps you assess the product’s actual value and growth potential

Private equity firms need to understand the investment’s long-term value. A technology roadmap that helps reveal growth potential is key to determining this. The product roadmap should outline the business’s upcoming initiatives, products, and strategies.

Private equity investors also want to know if forthcoming products have a well-planned go-to-market strategy. A go-to-market plan measures the product’s viability based on research on the product-market fit, target audience, demand, and competitive landscape. The plan also outlines a strategy for product distribution. 

3. Enhances the success rate of your M&A or investment

Technology due diligence is a crucial part of M&A and investment processes. It measures the suitability and compatibility of IT systems in a target company or organization. The thoroughness of your technology due diligence will vary depending on your goals regarding the acquisition or investment.

• If you’re hoping to use the acquired company as a springboard for further expansion, you’ll want to be sure that its IT systems are compatible with your own so that it will be easy to implement them in your other business units.
• If you see an opportunity for cost savings or wish to improve a particular process, you can assess whether their systems are complex enough or could benefit from being integrated with yours before exploring options like a system integration or upgrades.

How KMS Can Help with Private Equity Technology Due Diligence

It’s easy to miss details in company documents, so hiring a specialist is a smart business investment. KMS technology due diligence helps private equity firms identify opportunities to maximize value, reduce risks and potential liabilities, and improve negotiation positions. Our CTO and executive-level consultants will conduct the following: 

• Performance and scalability review  
• Code quality review  
• Technical debt assessment  
• Security strengths and vulnerabilities  
• Check out all our offerings here 

For a deeper dive into the intricacies of technology due diligence and how it affects private equity investments, visit our Private Equity & Venture Cap blog category. We cover essential topics such as the significance of software engineering for tech portfolios, tips for M&A technology due diligence, and strategies for maximizing your exit value with the right software partner. Access our comprehensive resources to stay informed and make strategic investment decisions.