Software Due Diligence
Efficient and minimally invasive measurement of the critical quality criteria for maintainability and extensibility of software assets. This is based on measuring the quality of the features in the code instead of a pure code quality analysis and the maintenance and extra effort to implement new features. This approach delivers much more insights than a pure code analysis.
- Identify necessary investments in your software
- Predict maintenance efforts
- Assess the quality, sustainability and accuracy of AI/ML integrations
- Find out who the key contributors are and measure the knowledge distribution in the team
- Evaluate digital readiness
- Align investor goals with the technological capabilities of the target software
What is Software Due Diligence?
A software due diligence (often part of a technology due diligence) is an analysis and evaluation of the code base and the software engineering with focus on potential risks. These often result from poor quality, a problematic technological basis and a lack of scalability.
A software due diligence is sometimes also offered as part of a technology due diligence, technical due diligence or even IT due diligence, which does not do justice to the complexity of the topic. Investors should ensure that the right scope, expertise and analysis tools are used to avoid pitfalls.
In an M&A transaction, a professionally conducted software due diligence reveals the opportunities and risks for successful further development of the software at an early stage.
In order for an investor to make a fact based investment decision, the software centric-questions should be answered, for example:
What is the technological future viability of the software?
Are state-of-the-art development methods in use? Is there adequate documentation of the code and architecture?
Can the software be further developed and maintained with normal effort and cost?
Are the relevant developers of the software on board after the transaction?
How efficient is software development done by the team(s)?
To what extent does the use of artificial intelligence (AI) represent added value and has its potential been fully exploited technically?
What security risks exist in the software or in the use of open source software?
How does the software development compare with the market?
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Why is a software due diligence important?
“In short, Software is eating the world” (Marc Andreessen)
The importance of software for the success of a company is increasingly growing in a digitized business world - software has to be seen as the backbone of digitization. Therefore software must bring with it the potential to be easily and flexibly adapted to new requirements and technologies. This is not always the case. Software assets are thus becoming more and more relevant for valuation in M&A transactions. Due to the special know-how required for a professional software analysis and in view of the importance of the results in the decision-making and negotiation process, the topic of software should be given its own workstream in a due diligence.
Because of the high technological dynamics in digitization, it is important to determine in software due diligence whether the software could follow current technological trends and can be upgraded with enhancements or new features with normal effort.
This drive for change also means that, in addition to the capabilities of the software, the software engineering and development processes must also be considered. They could easily become the bottleneck of an otherwise future-ready software. Identifying a dependency on external development service providers is also a valuable insight when it comes to assessing risks for the investor.
"Software must be designed to be flexible enough that it can be updated with the appropriate features to answer questions that aren't asked yet today."
To ensure that the software can be further developed without interruption and according to the investor's priorities, the potential risk minimization and development activities after Day 1 are identified in the software due diligence and prioritized with an effort/benefit assessment. If requested, we support and manage these activities in the acquired company.
Cape of Good Code has developed a modular analysis method in which all relevant fields of investigation for a software technology due diligence are either processed with the DETANGLE® Analysis Suite or by our experienced consultants. The final conclusions and report are in any case developed by our consultants.
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Our DETANGLE® Analysis Suite can be used for software companies as well as for companies that intensively use proprietary software for their value creation. Feel free to contact me.
Which modules are used in the software analysis follows the logic of the investment thesis, the complexity of the target and is specified by the investor in a briefing.
The following aspects should always be of particular interest when examining the target company:
- the maintenance effort for a largely trouble-free further operation
- the ease with which the software can be expanded to include new features and functionalities
- the interoperability and integration capability into the company's own software product range
- the future readiness of the software in terms of scalability, performance and the use of current technologies (e.g. cloud)
- the quality, sustainability and accuracy of any artificial intelligence (AI) used and its data sources
- the lowest possible dependency on individuals and suppliers
- the technology risks that should be eliminated first after Day 1
Why also consider the development methodology and culture?
Another, often neglected aspect in the evaluation of risks in software-centric companies are the software development processes.
Relevant questions for the strengths and weaknesses of the software development process are:
- Are requirements, features, bugs recorded, planned and their code changes recorded in a structured manner?
- Can a new version status be technically created, tested and rolled out in the shortest possible time?
- Can each version status be tracked transparently in terms of planned and actually rolled out features?
- To what extent is the user integrated into the bug tracking process to ensure timely and comprehensive reporting of the bug?
- To what extent are update and upgrade mechanisms automated in the software?
Only when combined, the examination of the technology and the development process provides an adequate picture of the extent to which the target company is prepared for the challenges and opportunities of digitization.
Digital business models fundamentally change the requirements for software development. It is no longer just about optimizing or stabilizing, instead it is essential to innovate continuously.
Whether the target company has implemented or automated appropriate technical processes beyond agile development methods and whether these are also practiced is reviewed in the software due diligence.
In addition, it is important that new features are tested efficiently at the technical and user level before they become an integral part of the software. Integrating user feedback in particular ensures that features are of relevance and user-friendly. This in turn ensures that the launch of new features can be carried out quickly and with a minimum of issues.
It is precisely the aspect of development methods and culture that determines whether the company or division is capable of playing a leading role in the upcoming challenges posed by the digitization trend.
How long does a software due diligence take and what do I get?
M&A transactions are under high time and success pressure. The due diligence itself is additionally under cost pressure, because not every one leads to a successful closing. Cape of Good Code has tailor-made offers for the respective stages in the M&A transaction to align scope and cost with the probability of a successful deal.
Red Flag Software Due Diligence
Capture the risk issues of a software in a short time and with manageable effort
Deep Dive Software Due Diligence
Get a detailed picture of the software and recommendations for action for Day 1
|Quick check of data room|
|Full analysis of data room + document request list|
|Verify document and general findings with interviews|
|DETANGLE analysis of code quality|
|DETANGLE analysis of architecture quality|
|DETANGLE analysis of system and open source software security|
|DETANGLE based evaluation of knowledge distribution risks|
|Assessment of engineering processes|
|DETANLE based estimation of potential costs to develop software from scratch|
|Extensive report + suggestions for R&D priorities from Day 1|
Red Flag Software Due Diligence
For a first risk assessment for a non-binding offer a Red Flag Software Due Diligence is sufficient. This focuses on the known potential risk issues in a software. The effort is modest with a maximum of 5-8 days. Already in this case, the code and its architecture are examined with the DETANGLE® Analysis Suite. Risks such as increased maintenance costs, critical technical debt as well as security and organizational problems are identified. This ensures that potential technology red flags are not overlooked at an early stage of the M&A transaction.
Deep Dive Software Due Diligence
In the binding offer phase, a Deep Dive Software Due Diligence should be performed based on the Red Flag Due Diligence findings. This investigation takes 10-20 man-days of effort. It provides additional and detailed information about the extent of the Technical Debt, the resulting risks, but also an estimate of the effort required to resolve the critical Technical Debt. In addition, the dependencies from developers and suppliers are made visible. Depending on the assignment, recommendations can also be made for the most important R&D tasks starting from Day 1.
Are you interested in a software du diligence and a personal meeting? I will be happy to help you.
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What sets DETANGLE® apart from other code analysis tools?
The DETANGLE® Software Analysis Suite also analyzes the software directly in the code, but correlates development history, maintainability and extensibility with the bugs and features of the software. As a result, it becomes possible to link the software potential, as outlined in the Information Memorandum, with the technical and organizational reality of the software and its development environment.
The findings of the DETANGLE® analysis are interpreted by experienced software specialists and presented in an understandable way in the Software Due Diligence Report. This provides an investor with a sound data basis for the technological risks and opportunities of the planned investment. Equally important are the recommendations on priorities for post-closing actions.
The Cape of Good Code analysis
- how far is software engineering already prepared for digital business models
- to which extend is the further development of the software ensured without the necessity a costly new start or other unplanned effort and costs
- about the quality, sustainability and accuracy of any artificial intelligence or machine learning algorithms (AI/ML) and data sources used
- about potential dependencies on key developers and supplier
- does the software engineering process meets the requirements of an state-of-the-art development methodology and quality assurance
- Is the software documentation sufficient for seamless further development. Where are the main gaps located in the code?
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