SERVICES _

Vendor Software
Due Diligence

Vendor software due diligence analyzes not only the quality of the code base and code architecture, but also the software engineering process. The aim of this analysis is to proactively identify potential risks that could negatively influence the value evaluation during due diligence by potential investors.

A vendor due diligence builds investor trust and enables higher proceeds for the vendor
Identify weaknesses in the software before the investor does
Resolve the key problems before starting the M&A (80:20 rule)
Identify the key developers who should remain with divestment
Fill the data room with the required documents and metrics
Avoid doubts about the technological value of the software
Prove that both the technological base of the software and the development team are scalable

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DEFINITON _

Can risk deductions for software assets be avoided?

Vendor software due diligence is the technological review of custom software initiated by the owner to prepare for a sale to an investor. Vendor software due diligence analyzes not only the code base and code architecture, but also the software engineering process. The goal of this analysis is to proactively identify potential risks that could negatively impact the value evaluation during due diligence by potential investors.

The main differences of a vendor software due diligence to a software due diligence are:

A slightly lower time pressure
Easier access to information and people
Promoting maximization of the sales price

The focus of the analyses are the current software quality, the required technological future readiness and the scalability of the software and development processes for new application scenarios and commercial growth. Thus, vendor due diligence is not just a project to produce documents for the data room. Its true value lies in the avoidance of unnecessary risk discounts.

Cape of Good Code's software due diligence methodology supports the divestiture of software companies or software assets by safeguarding the sale proceeds of the M&A transaction. Since our consultants are software developers themselves, our approach is pragmatic. We know that not every code imperfection is a risk and needs to be corrected immediately.

To avoid overburdening developers, with corrective work that is not absolutely necessary, the results of the software vendor due diligence are prioritized in an effort vs. benefit matrix. This approach filters out in particular the critical problems that can be remedied with reasonable effort without significantly delaying the planned sales process. If significantly more extensive measures are required, a temporary suspension of the M&A transaction would be recommended.

It has been shown that a vendor due diligence report can accelerate an M&A transaction and increase value. It creates trust and transparency, which leads to faster negotiations and lowered risk discounts.

Why is a Vendor Software Due Diligence not a Tech Due Diligence?

A Vendor Software Due Diligence requires special expertise and experience in software development. It is sometimes offered as a sub-project in a Vendor Technology Due Diligence, Vendor Technical Due Diligence or Vendor IT Due Diligence. This may not do justice to the complexity of software issues because the risks in software do not reveal themselves without specialized tools and expertise.

When selecting a consulting firm for vendor software due diligence, ensure that the right scope of investigation, presence of specific expertise and experience, and that the latest analytical tools are applied (read more in our blog post "Avoid Pitfalls in a Software Due Diligence").

We recommend that the consultants, that were involved in the project, support the development team to ensure consistent, but also pragmatic implementation of the solutions for the identified issues.

Egon Wuchner, CEO

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Every project is unique and presents different challenges. We always have your company in mind and develop solutions that suit you.

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Why is preparation key before selling software companies or assets?

Before selling software assets or software-centric business models, it makes sense for the seller to answer the following questions:

What specific technical arguments can an investor (buyer) make to negotiate the price or include risk provisions in the contracts?
At what cost can current problem areas (e.g., technical debt) be resolved or mitigated?
How can software R&D priorities be strategically adjusted in preparation for the sale?
What R&D activities could be stopped?
How sustainable is the technology in light of current technology trends?
Can the software engineering methodology follow the technological development dynamics of the targeted investor group?
Are there critical dependencies on individual developers or individual contractors (e.g., freelancers)?
Which developers are necessary for the successful further development of the software and which are less necessary?
Which developers would be necessary for further development but should remain with the vendor?
How efficiently does the development team work together?
Is there adequate documentation of the code and architecture?
Can an investor further develop and maintain the software with reasonable effort?

Cape of Good Code can answer these questions efficiently and comprehensively with its experienced consultants and by using its DETANGLE® Software Analysis Suite. The final report of the Vendor Software Due Diligence contains all important information and suggestions to maximize the value of the software assets before they are offered for sale.

Why does a vendor software due diligence make sense?

Software is the backbone of digitalization and is experiencing a very high innovation dynamic. However, software is a product whose characteristics and long-term quality remain hidden in hundreds of thousands of lines of code. This can unsettle investors who have little experience with M&A transactions of software and software-centic business models. Trying to reduce this uncertainty by means of highly complex contracts is neither satisfactory for the buyer nor for the seller and regularly leads to costly and not always successful negotiations.

A vendor software due diligence is a measure for the seller to reduce potential risks before the investors due diligence is started.

With the due diligence report, the vendor receives transparency about the code quality, the future viability of the architecture and the extent of the technical debt of his software. With the recommendations from the report, he can address the most critical vulnerabilities of his divestment before a potential investor could uncover them in his due diligence.

This creates a win-win situation for both vendor and investor, as it can lead to a better valuation and more interested investors, while the transparency and issues already resolved increase the likelihood of the investor successfully pursuing the business.

What is analyzed in our vendor software due diligence?

Cape of Good Code has developed a modular analysis method in which its consultants analyze all important areas of interest in a proprietary software by using the DETANGLE® Analysis Suite as a tool platform. The vendor defines the scope and the level of detail of the analysis in his briefing. It also makes sense to take into account the targeted investors and their main interests.

The following aspects should always be of particular interest when reviewing the software, as they would most likely be examined by any investor as part of a due diligence process:

The maintainability for the continued operation of the software
The extensibility of the software to add new features or functionalities
The interoperability and integration with other (own) software products
The scalability of the software for use in the cloud using the latest technologies
The security level of the software (including third-party software)
Critical dependencies on people and suppliers
Gaps in the documentation of the software
The quality, sustainability and accuracy of any artificial intelligence (AI) used and its data sources

The seller of a software-heavy business should use vendor software due diligence:

to clarify that there are no serious risks for a potential investor to develop the software with normal effort and cost
to prepare the data room with an appropriate level of useful information to enable a risk assessment of the technology and the development organization
to identify the most critical problems that could stand in the way of an attractive evaluation, including an effort estimate to resolve these problems
to determine the optimal time to start commercialization of the planned divestment.

Standard
Advanced

	Standard < 1 Mill. Lines of Code GET A QUOTE NOW	Advanced > 1 Mill. Lines of Code GET A QUOTE NOW
DETANGLE analysis
Dataroom preparation	1 - 3 Tage	TBD
Opportunity/risk analysis	5 - 10 Tage	TBD
Recommendations and roadmap	8 - 15 Tage	TBD
Report
Project management and coaching for implementation	TBD	TBD

What is special about the software analysis with DETANGLE®?

The efforts mentioned in Figure 2 are based on the use of a highly efficient analysis tool. The DETANGLE® Analysis Suite is perfectly suited for this purpose.

The DETANGLE® Software Analysis Suite analyzes the software directly in the code. The innovative approach is to analyze the entire development history and correlate maintainability and extensibility with the bugs and features. This correlation makes it possible to match the strengths, but also the weaknesses of the software with the technical and organizational reality.

The results of the DETANGLE® analysis are interpreted by experienced specialists and compiled in the Vendor Software Due Diligence Report. This provides the vendor with a solid base of actionable insights to maximize the value of their divestiture by reducing risk and increasing opportunity.

The Cape of Good Code Vendor Software Due Diligence with DETANGLE®:

Shows whether software development is prepared for new digital business models
Assesses whether documentation is sufficient and, if so, prioritizes the elimination of critical documentation gaps
Measures the extent to which further development of the software is possible on the basis of the software core with normal effort
Assesses the extent to which the software is cloud-ready and how it would scale in the cloud
Evaluates the security architecture of the software
Assesses whether the software engineering process meets the requirements of modern development methodologies from an organizational (agile) and technical perspective
Identifies dependencies of employees and suppliers in order to make organizational provisions

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Software Analysis

Software Due Diligence