Software Due Diligence: Its Key Aspects For Successful M&A Deals

As software often plays a significant or even dominant role in the financial valuation of an M&A transaction, it is highly recommended for investors to analyse the technical quality of the software and the efficiency of the development processes by means of a professional software due diligence.

For this purpose, an investor should carefully select a consultant with the necessary expertise, as the software technology, the scope and the assumptions in the investment thesis determine which questions and methods should be used to carry out the software due diligence.

The choice of investigation methods in a software due diligence depends, for example, on whether

• the company is a start-up or a corporate group
• the software was developed in-house or with/through partners 
• the development team is small or large and works in a centralized or decentralized way 
• the scope of the software is small, medium or large
• the software uses AI algorithms 
• the user base or data volume will increase significantly after the acquisition  
• if an analysis scan with a software tool from the code base is permitted
• if indications of R&D priorities after Day 1 are expected
• who the main audience of the final report is.

The following multi-part blog discusses questions that arise from the above-mentioned expectations and realities for conducting a software due diligence. The expectations from the investor's perspective must also always be considered:

Part 1: Influence of company size and organisation on the execution and focus of a software due diligence. 

Part 2: Basics of IP protection for the seller when analyzing his software assets. 

Part 3: Influence of software technology and application size on the methods and tools of software due diligence. 

Part 4: Influence of the target's internal and external development processes on software due diligence

Part 5: What to do with the findings after a successful acquisition? 

[0] Photo by Tima Miroshnichenko