Pre-acquisition health: The technology due diligence check

04 November 2021 6 min. read

2021 is seeing record M&A levels across the globe, with technology deals driving much of the frenzy. Greg Fennewald, an Associate Partner at technology sector focused consultancy AKF Partners, reflects on the growing need for conducting a due diligence on technology capabilities and health.

In today’s environment it’s vital for an investor to have a deep, accurate insight into the technology capabilities of its proposed investment, especially in terms of the scalability of the architecture, the quality of technical decision-making and the strength of its technology team.

However, when it comes to undertaking due diligence before an acquisition, many are familiar with the importance of unearthing any possible financial, legal, or operational risks but one area that may be overlooked is the company’s technology – even though this can be the most important element and have significant impact on the business value involved.

The technology due diligence check

A company may seem great on paper and their technology may be positioned as an industry breakthrough but there can be hidden problems underneath. Some may not yet even be known. For example, a company’s technology may currently work flawlessly but if it won’t be able to scale alongside the projected growth or the architecture may not be able to evolve easily to expand into new services or new geographies, then this will cause problems. 

Gathering the evidence

For a thorough tech due diligence, it will be necessary to go to the target company and talk through key areas with the tech team. Whether this is done virtually or in-person, getting everything needed can take time. Investment timelines, on the other hand, are short. To get the most from this session, it is important to source background from the target company in advance and to ask for the right information. 

This is where it can be good to bring in a knowledgeable and experienced third party – they’re objective, know what to ask for and can share a fair and unbiased assessment. 

Good technology teams are usually well prepared for any diligence assessment and can easily provide documentation on their architecture, their future plans and development practices ahead of any formal assessment sessions. 

For the technology itself

Architectural diagrams are a clear and easy way to show how the tech stack works together and, more importantly, to spot potential strengths or weaknesses. These diagrams also give a good indication of the technology product’s availability and the extent to which it could potentially be scaled – already outlining whether this may or may not be an issue.

These diagrams tell the story of the current state of the technology, but what about where it came from and where it is heading next? For this, roadmaps from the past two years and the upcoming year should be requested. Beyond the technology, this can also show overall company priorities.

Some warning signs, for example, may be product feature desires being consistently prioritised over technology needs. The company may also talk about its agile methodology but if it has fixed dates for delivering new features that are far ahead in the future, this may not necessarily be the case in practice. 

If the target company is not a start-up, alongside this road map, it should also be asked for an incident list from the past two years. This can be sensitive but it is more important to see what is being done to prevent any recurrences and limit any negative impact, rather than the incidents themselves. 

For the wider picture

As previously mentioned, it is also important to have insights into the technology team. An organisational chart of the technology team can give an idea of who the decision makers and main influencers are, where priorities lie, and the general strategy and approach.

For example, is the team product focussed or does it have more of a traditional IT mindset when it comes to products? It is also important to dive into the tech team’s budget for the past three years, what it is currently and what the planned budget is for next year. There are general expectations for technology spend and any unusual spend amounts are certainly call for some further questions.

Outside of the technology team, it’s important to ask what software is being used or which technology partners are the target company working with? As well as the likes of outsourcing costs, a list of vendors and partners can offer glimpses into technology strategy based on why they were or weren’t chosen. 

Talking through the symptoms and sharing the diagnosis

All these documents give a good overview of the health of the products or services. But in the same way it is good to talk through personal health concerns and a doctor’s diagnosis, it’s important to give the target company an opportunity to do this. It is not about marking the tech team’s homework but rather having an open and honest conversation. 

As mentioned, some requests or documents, such as the incident report, may be sensitive, or not all those involved in the discussions may have been party to decisions about working with particular vendors or partners – they may have even since changed their minds. These sessions are an opportunity to talk through additional circumstances and context that may not come through in the documents provided.

It’s important that this is communicated to the target company, so that these conversations are fruitful and productive. They may also not know all the answers, but these must be subsequently followed up on.

After these sessions, there should be a very clear, deep picture of the current state of the tech, how it is developing and any elements that may need to be re-assessed or changed, particularly to ensure that it will work for you and your plans. If working with a third party, this should be shared as a written report and spoken through with you, not the target company, unless desired. 

No matter the final diagnosis, having performed this health check will ensure that you have unearthed potentially hidden symptoms, ascertained the health of the technology, and will be fully informed to make the next step. While the rate of mergers and acquisitions may be accelerating, this is a key stage that shouldn’t be rushed over or overlooked.