SaaS Technology Preparedness for Acquisition Due Diligence

KMS Technology’s COO, Leo Tucker recently sat down for a virtual coffee talk with Software Equity Group’s (SEG) Managing Partner, Allen Cinzori. The two discussed how SaaS companies can prepare for an M&A process and common challenges that might arise. 

To kick off the conversation, Allen shared an experience he had remodeling his house. After getting beautiful plans drawn up from an architect, he submitted them to the city only to find that they didn’t meet some of the requirements. 

He likened this time-consuming and costly misstep to challenges that could arise in an M&A process, asking Leo “What are the four 101 technology diligence items that SaaS CEOs should consider if they are interested in liquidity in the near term or next 2-3 years?” 

4 Technology Diligence Items to Consider For an Upcoming Liquidity

Document, Document, Document

“If you are not sure…document,” Leo advises, “document more than you need to.” 

He goes on to explain that adequate documentation will make the diligence process a lot easier. The organization performing the diligence assessment will have a better understanding of what is going on, and SaaS leaders will be able to better and more clearly tell their product’s story. 

For those with a process right around the corner, good news. Leo explains this is something that can be done in a matter of weeks, offering a near-term but impactful action item. 

Know Where Your Issues Are…Before You Are Asked About Them 

Leo advises bringing in a third party to look at your architecture, examine your code, and talk to your team. This unbiased opinion offers insight into how you stack up, where issues lie, and more. 

With this information, organizations can proactively address issues and are better positioned for liquidity.  

Be Able to Tell Your Story 

Knowing how to tell your story is an important piece of the puzzle. Leo explains that some companies have brilliant technologists and thorough documentation, but they can’t tell their story. 

“Identify who on your team tells the technology story in a compelling way,” Leo recommends. This person should be able to tell your story so that it is easily understood by both a business and technical audience. 

Use the Time You Have 

So what if a company has more time and is 2-3 years out? Leo shares that those organizations should spend the time fixing some of these underlying technical issues. 

Allen follows up, asking “how do they know that they have those issues?” He goes on to explain, oftentimes people will be in a diligence process and then find out about an issue they were unaware of. 

“There are 2 sure-fire ways,” Leo explains. 

  1. Your customers will tell you. Listen to them.
  2. Bring in an outside third party who can take a look and give you an honest and unbiased view

Looking for an unbiased partner for your acquisition due diligence?


The Most Common Mistake Sellers Make in Acquisition Due Diligence

Leo shares that one of the most common issues he encounters in an M&A process is when people begin to answer a question or talk to a topic that they don’t firmly understand. 

It’s very common,” Leo says, “and it’s so preventable with coaching. The easiest takeaway is just to say, “hey, you know what, I’m not certain. Let me get back to you.” It’s important to remember that the people on the other side of the table are people too. They understand, and they would rather you come back with the right answer.”

Key Boxes a Buyer Checks When Performing a Tech Review

People, process, technology.

Questions A Diligence Partner Typically Asks: 

How distributed is the knowledge?

It’s a big red flag when all of the knowledge lives in one person’s head. Leo shares that KMS recommends a combination of adequate documentation and training a backup person.

What’s your development methodology? And what’s your requirements-gathering methodology? 

These questions help uncover the source of innovation. If all of the requirements are coming from one person, that is probably not a sustainable model for a product. 

On the development process side, the question becomes will this scale? 

VC and PE firms are investing for one reason, they want that business to grow. If the development team can’t scale because their process doesn’t work, they have a real problem.

Allen adds an anecdote he always tells clients, “when you are answering questions…pick the [answer] that meshes sustainability and scalability.” He goes on to share a story of a seller who sung the praises of his development team. 

The buyers’ takeaway? They believed he had an incredible team but worried that they couldn’t find comparable people to continue to scale and grow the business. 

What open-source code do you have? 

With a Black Duck Audit, someone will come in and look for that source code. Why? People want to understand the security and licensing. 

Leo explains open-source code can present some security issues and licensing can open you up to litigation. 

Know where your open source is and have it documented.

What is the tech stack?  

What is the tech stack and why did you make some of the decisions that you made around it? 

“In a lot of cases,” Leo explains, “decisions are very defensible.” Even if you don’t have the most modern tech stack, you just need to be prepared to explain why.  

If you had to do it all over again, what changes would you make? 

This question is a great way to uncover issues that someone might not mention outright. 

Allen shares that it’s important to remember that at this phase a buyer wants to close a deal. They are not trying to find issues, but rather trying to understand how significant issues are and what will be involved to fix them. 

Recognize where your weaknesses are and be open and transparent. 

What is one piece of advice for a software CEO entering into an M&A Process? 

Leo recommends engaging an outside source to look over your code and understand your processes. This unbiased review will help you identify any problem areas before you get into the M&A process, instead of uncovering them once you are in a process. 

An investment of a few thousand dollars could potentially mean millions on the other end.

Work with KMS Technology on technology due diligence and ensure you are prepared for your M&A process.


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