Vendor Software Due Diligence

Ensure a High Valuation of Software Assets

A Vendor Software Due Diligence is the technological examination and evaluation of individual software initiated by the owner to prepare the sale of these assets in an M&A transaction to an investor. In the vendor software due diligence, not only the code base and the code architecture, but also the software engineering process are analyzed. The aim of this analysis is to proactively identify potential risks that could be a threat for the value evaluation in a Due Diligence executed by potential investors.

The scope of the analysis is the current software quality, the required technological sustainability in the future and the general scalability of the software and the development processes for new application scenarios and commercial growth. A vendor due diligence is therefore not just an exercise  to create documents for the data room.  Its true value is to avoid risk discounts by the potential investor identified in the due diligence.

The Cape of Good Code software due diligence methodology supports the divestment of software businesses or assets with actionable insights to secure or even create value for the planned M&A transaction. As being software developers ourselves we know that not every imperfection needs correction or is a risk.

In order to not disturb the mostly fully absorbed developers with additional corrective work, that wouldn’t be really necessary, the findings are  prioritized by Cape of Good Code in an effort vs. benefit matrix. This approach particularly filters out the problems that are critical but could be resolved with reasonable effort in a rather short time before the sales process is initiated. It is proven that a vendor due diligence report can speed up a M&A transaction and increase value, as it creates trust and minimizes the risks that otherwise have to be covered in lengthy negotiations, extensive contracts and financial reserves for unknown risks.

A Vendor Software Due Diligence Is Not a Tech Due Diligence

A vendor software due diligence requires in-depth knowledge and experience in software development. It is sometimes also offered as part of a vendor technology due diligence, vendor technical due diligence or vendor IT due diligence, which cannot do justice to the complexity of the software topics.

When choosing help from consultants, the seller should ensure that the correct scope of investigation, the correct expertise and the correct analysis tools are used (more about this in our blog post on how to Avoid Pitfalls in Software Due Diligence). It is also useful to consider whether the consultants should support the development team in resolving the identified problems. These decisions have to be taken before hiring a consultant.

A professional vendor software due diligence  is essentially similar to a software due diligence executed by the investor in terms of the analysis process. The main differences are:

  • Often a slightly lower time pressure
  • Easier access to information
  • Main goal of maximizing the value

In the case of a planned disinvestment (the sale of the company or part of it), it is advantageous for the seller to apply a vendor due diligence for the entire entity or assets that shall be divested. There will be several low hanging fruits that require little effort to be corrected and will have significant positive impact on the marketing of the entity and on achieving an attractive value for it.

Timing and Preparation Matter When Selling Software Companies

Before selling software assets or software-centric business models, it is useful to answer the following questions as a preparation:

  • What specific technical arguments can an investor use trying to push down the price or include risk discounts in the contracts? How applicable would they be?
  • With how much effort can current problem areas (e.g. technical debt) be solved or mitigated?
  • How can the R&D priorities of the software be strategically adjusted in preparation for the sale?
  • Which R&D activities could be stopped?
  • How sustainable is the technology in regard to actual technology trends?
  • Can the software engineering methodology follow the technological development dynamics of the identified investor target 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 or can I let them go?
  • How efficiently does the development team work together?
  • Is there adequate documentation of the code and architecture?
  • Can an investor continue to develop and maintain the software with normal 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 maximise the value of the software assets before putting it for sale. This ensures that your software is not perceived as a particular valuation risk in the investor due diligence.


Contact us for more information on our Vendor Software Due Diligence.


Why Is a Vendor Software Due Diligence Useful?

Software is the backbone of digitalisation and is therefore subject to very high innovation dynamics. However, software is also a product whose actual properties and long-term quality remain hidden in hundreds of thousands of lines of code and its technical architecture. This unsettles investors who are not used to digital products. The attempt to reduce this uncertainty in highly complex contractual clauses is not satisfactory, neither for the buyer nor for the seller and regularly leads to highly complex and not always successful negotiations.

A vendor software due diligence is a measure to largely relieve the investor of uncertainties about hidden risks in the technology of the target. 

The vendor obtains transparency regarding the code quality, the future viability of the architecture and the extent of the technical debt, which he would not have been able to determine by an “off-the-shelf” technical due diligence. At the same time, in the course of preparing the divestment, the seller can use the information from the vendor software due diligence to eliminate the most critical weaknesses before a potential investor starts his due diligence. As the length of the selling process can not be determined it is as well useful to align the priorities of the ongoing R&D roadmap with the anticipated strategies of the targeted group of the investors.

This creates a win-win situation for both vendor and investor. And has often resulted in a better valuation and a higher likelihood of a  successful continuation of the company under new ownership.

What Is Examined in a Vendor Software Due Diligence?

Cape of Good Code has developed a modular analysis method in which all fields of interest are analyzed using the DETANGLE® Analysis Suite as a tool platform and experienced consultants. The investor aligns in his initial briefing of the due diligence workstreams the scope and level of detail with his investment thesis.

Fields of investigation of a Vendor Software Due Diligence

Figure 1: Fields of investigation of a Vendor Software Due Diligence

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

  • The maintainability for continued operation of the software
  • The extensibility of the software with new features or functionalities
  • The interoperability and integration with other software products
  • The scalability of the software for use in the cloud using current technologies
  • The security level of the software (incl. third-party software)
  • Critical dependencies on people and suppliers
  • The efficiency and collaboration of the development team
  • Documentation gaps of the software

We ask these questions to the seller organisation:

  • To clarify that there should be no serious risks for a potential investor to further develop the software with normal efforts
  • To prepare the data room with an appropriate level of useful information to enable a risk assessment for the software technology and it engineering
  • To set up a roadmap to solve the most critical issues hindering an attractive valuation.
  • To find out the optimum timing to start the marketing of the  planned divestment to the investors community.

The effort involved can vary considerably depending on the scope, time pressure and status quo.

Scope Effort
Compile documents for the data room or prepare a minimum set if required 1-3 days
Analysis of sellers risks and opportunities for the divestment incl. report 5-10 days
Analysis of sellers risk and opportunities incl. report, recommendations and an implementation roadmap 8-15 days
Project management or coaching of the improvement measures open

Table 1: Possible scope of analysis and an estimated effort for software with up to one million lines of code.

Some of the risks and opportunities are described in our blog post on the 10 Mandatory Criteria When Selecting a Software Supplier

What Are the Benefits of a  Software Analysis With DETANGLE?®?

The efforts mentioned in Table 1 are based on the use of a highly efficient analysis tool. The DETANGLE® Analysis Suite suits this purpose perfectly.

The DETANGLE® Software Analysis Suite analyzes the software directly in its code. The innovative approach is the analysis of the whole development history and the correlation of maintainability and extensibility with bugs and features. This correlation allows comparing the potential but also the weaknesses of the software with the technical and organisational reality of it.

The results of the DETANGLE® analysis are interpreted by experienced specialists and compiled in the Vendor Software Due Diligence Report. This provides a vendor with a sound basis of actionable insights to maximize the value of his divestment by reducing risk and amplifying the opportunities.

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

  • Shows whether the software engineering is prepared for new digital business models
  • Assesses whether the documentation is sufficient and prioritises the elimination of critical documentation gaps if necessary
  • Measures the extent to which further development of the software on the basis of the software core is possible with a normal amount of effort
  • Evaluates to what extent 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 a modern development methodology from an organisational (agile) and technical perspective
  • Identifies dependencies on employees and suppliers, enabling organisational preparations to be made

Ask Us About Our Offer

Are you interested in a Vendor Software Due Diligence with DETANGLE®? For an offer for you and your software product we need the following information:

  • Brief description of your software solution and business domain
  • Type and number of ticketing systems used (issue tracker)
  • Type and number of repository systems used
  • Code size (number of lines of code)
  • Age of the code in years
  • Number of active developers

Contact us to clarify any questions or to discuss further details.