The Top Factors to Consider for M&A Technical Due Diligence

Software mergers and acquisitions require very comprehensive due diligence to ensure the entire process goes smoothly. Of course, a lot of surprises come up during M&A technical due diligence, but it’s always better to find them—and manage them appropriately—sooner than later.

In this article we’re going to cover some of the most critical technical aspects to consider during technical due diligence and what should be expected from them in terms of preparations and required documentation. So, to learn more about the importance of technical due diligence and the necessary factors involved, keep reading. 

The Importance of M&A Technical Due Diligence

You wouldn’t buy a new home without having a licensed professional inspect it, would you? And you can’t do the job yourself, can you? Sure, a home inspection is costly—but that cost is nothing compared to the cost of the actual home, not to mention the peace of mind it brings.

There are a lot of variables to consider here, and any defect can modify the sales price. In some cases, it can even deter you from signing the deed. That’s why it makes so much sense to have an experienced third-party come and evaluate and protect your investment.

The same concept holds true when it comes to mergers and acquisitions. In terms of merger and acquisition due diligence, it’s necessary for leaders of acquiring companies such as Private Equity (PE) firms or technology companies to use a third party to evaluate the technical factors concerning the target software company. After all, being well versed in financial concepts isn’t the same as technological concepts.

Additionally, most acquiring firms already have a set of investment objectives in mind for their new technology company. Having technical due diligence performed to evaluate certain aspects such as the product, architecture, processes, and organizations are precisely what ensures that those objectives are met before the deal is closed.

An in-depth look at the aforementioned aspects also helps to validate any assumptions made by the investment firm. For example, the ability to scale the number of users times ten within three to five years.

What If it’s a Software Company Acquiring Another Software Company?

It may seem redundant for a software company acquiring another software company to hire a third party to evaluate their M&A technical due diligence. However, it’s just as necessary for software companies as it is for PE firms and other acquiring companies.

The primary reason for this is that competitive intelligence may be at stake during the merger. A third party team that has signed a non-disclosure agreement will help protect that intelligence. Secondly, a third party team typically has varying expertise when it comes to technical due diligence. They’re more capable of being objective and have the capacity to compare hundreds of companies to target ads which adds further value to the diligence process.     

The Essential Factors to Consider for M&A Technical Due Diligence

There are quite a few different categories concerning M&A technical due diligence. Those categories include the following:

  • Financial (accounting, quality of earnings, taxes)
  • Legal ( intellectual property, corporate governance, antitrust)
  • Customers (contracts, warranties, customer satisfaction)
  • Employees (payroll, employment contracts, cultural fit)
  • Technology (product, process, people, etc.)

Of course, when focusing on the technological aspect of due diligence, here are the essential factors that need the most attention: 

Architecture and Infrastructure

The architecture of the technology in question must be presented and described adequately. When auditing and evaluating a technology’s architecture, your team will need to review the relevant documentation, including architectural charts, performance indicators, scalability, and so on.

This is also where the comparison between your technology and the product in question compares. You’ll need to know how they’ll fit in terms of integration. 

In terms of infrastructure, understanding the underlying technological choices such as programming languages, app servers, databases, and other tools that make the technology work is also critical. You can’t make technology work for you if you don’t know what it’s composed of. 

When performing the technical due diligence for architecture and infrastructure, the acquiring party will need all of the above documents archived. That includes everything from product design documents, architectural descriptions API documentation, PoC results, to operational metrics.

It’s also necessary to make sure you’ll have access to the development and deployment environments, including the tools used and a guide on configuration management and build tools. If relevant, you’ll also need to review any open source components, third-party tools, patch tools, and the common standards and integrations with other products within the technological environment.

It’ll also help to review any documentation of how the technology being acquired has grown. That would include a history or any problems, failed attempts to solve it, and the changes made that enable addressing the issue possible with your standing technology.

Scalability is also a critical area of concern. This is especially true when for startups that have yet to deploy their solutions with a larger customer base and enterprise-level systems. The data of all empirical tests that the previous team has performed is an essential part of this.

tech due diligence


Contrary to popular belief, you really can’t have technology without people. People are the key to creating and maintaining a technological product. They’re also the key to its troubleshooting.

That’s why it’s necessary to be provided with an organization chart that lets you know team roles and key players. This chart should also be backed up by a list of contractors and any outsourced resources and their roles. 

The company offering up their technology should be able to provide an updated organizational chart. That should include the resumes of all employees, present and past, as well as contractors and their contracts—plus potential employable talent and projected contracted costs for the current or upcoming year. 

There should be a well-maintained list of people and their skills, matching with the various components of the product in question as well as the development, maintenance, operations, and support roles regarding the product. It also helps to have details on staffing or contracting roles for potential investment.

Processes and Workflows

Your processes and workflows make up for a large part of how innovation and productivity are created and maintained. They’re also some of the most overlooked systems when it comes to M&A technical due diligence.

This is where it’s necessary to have the information about an organization’s development, quality assurance, security testing processes, and information about their deployment, operations, and support processes. It needs to be proven that these processes are effective, economical, and that they can support the continued development of the product in questions.

Once again, when it comes to preparation for technical due diligence, documentation is king. You’ll want to review documentation of the processes, people involved, resources, costs, and even timetables and market and product requirement documents. This would also include any performance metrics and key performance indicators (KPIs) used such as time to version release, time to support request response, and time to fix critical security and bug issues. 

Intellectual Property and Software Licensing

Intellectual property is arguably one of the most important assets in M&A technical due diligence. As part of the process of technical due diligence, to evaluate a product’s strength you’d need to see it’s software licensing. 

That means you’ll need to evaluate the patents that protect a product’s IP, as well as its freedom to operate to ensure that you’re not infringing on any intellectual property you don’t own. It’s also typically required to include an extensive list of any third-party components that make up the software, including any free or open source files and commercial libraries. 

You’ll also need to verify the compliance with software licensing for any third-party or open source components as it’s required by law. That means any documentation concerning agreements and payments must be addressed. There will also need to be proper documentation of an organization’s patents as well as patent searches to demonstrate the freedom for the acquiring party to operate the product.  

The Future

Another overlooked yet crucial aspect of M&A technical due diligence is a roadmap of the future. In other words, potential acquirers for investors will need to have a specific outline regarding plans for the future of the technological product in question. This should also include any new products or features that would be critical to the success of the technology down the line.

Documentation of the release history as well as all planned versions of technological solutions should be included for the evaluation. Everything from viable options considered by the organization that created the technology along with assessments that prove the viability of these options should be included as well as the future directions in terms of market and product requirements. 

Our M&A technology consultants bring over 20 years of experience to provide an unbiased assessment of your M&A targets’ tech stack, software architecture, security, and technical debt to identify and assess risks. If you are looking to be acquired, we can help you get ready ensuring you’re prepared and investors have the answers they are looking for, just request a consultation with us here.

Want to learn more about our Technical Due Diligence services? Visit our page here.


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