Strategic Technology Due Diligence: A Must-Have Checklist

Technology is one of the trickiest parts of any business transaction. It takes about 1.5 years to integrate in successful dealmakers and over two years in unsuccessful deals. However, that depends on multiple factors, and the quality of technology due diligence is among the most critical.

While complicated, tech due diligence is manageable when considering several business practices described in this article. Keep reading to learn about the following:

• Definition and scope of the technical due diligence process
• Important preparation steps
• Common items on a technology due diligence checklist
• Common risks and red flags during investigations

What is technology due diligence in mergers and acquisitions?

Technology due diligence investigates IT infrastructures and software systems of the target company during M&A, IPO, and other transactions.

Let’s dive deep into the technology aspects typically reviewed under tech due diligence.

Why conduct tech due diligence?

Accenture has found that 96% of CIOs conducting information technology due diligence reveal opportunities and risks significantly impacting post-merger businesses. Yet, only 21% of researched companies have conducted technology due diligence for their deals (as of 2022). It speaks of challenges in understanding the impact that quality tech DD makes:

1. Comprehensive risk assessment. Accenture has found that cybersecurity due diligence efforts uncover critical issues that require at least $8 million in remediation costs. 
2. Successful tech integration. Integrating technology functions takes so long because it requires careful planning, which depends on quality due diligence. One hundred percent of successful dealmakers complete IT integration within two years compared to 77% of unsuccessful ones.
3. Accurate valuation. An in-depth analysis of tech assets helps buyers establish more accurate deal valuations. That is because intangible assets, like proprietary software, domain names, patents, and trademarks comprise 80% of a company’s value. This percentage is even higher in tech startups.

Strategic buyers and private equity firms pursue the following goals with the tech due diligence process:

• Understand the target’s technology capabilities.
• Gauge technology synergies and cost-reduction opportunities.
• Develop a comprehensive technology risk profile.
• Prepare actionable recommendations for post-merger integration.
• Acquire comprehensive data for deal price negotiations.
• Understand how the target company compares with industry peers.

Who conducts technology due diligence?

Tech due diligence requires specific experiences and may not be fully executed by in-house teams only. Companies often hire M&A advisors and industry experts to facilitate the tech DD process. Seeking the following roles and capabilities while assembling a tech due diligence team will be helpful:

• Cybersecurity experts
• Software engineers
• IT auditors
• Data analysts
• Intellectual property lawyers

Preparing for technology due diligence: 3 steps

The following presents a step-by-step process for preparing for tech assessment:

1. Understand the scope and objectives.
2. Form an appropriate due diligence team.
3. Request due diligence documentation.

Understand the scope and objectives

The following tips will help set the scope and objectives of a strategic tech review:

• Align due diligence objectives. Consider overall transaction goals while developing due diligence objectives to ensure tactical and strategic alignment. Understand how due diligence fits into a broader perspective.
• Consult key decision makers. Consider concerns, expectations, and insights from executives, legal advisors, potential investors, and technology experts to develop an in-depth due diligence plan.
• Consider the market landscape. Recognizing the market landscape helps to understand the necessary depth of investigations. Thus, a software or tech-enabled company in a high-risk region may require enhanced due diligence.

Form an appropriate technical due diligence team

Based on our experience, these practices help companies align due diligence experts and promote smooth communications:

• Communicate an action plan. Ensure DD teams understand the scope and objectives of investigations and establish clear reporting lines. 
• Consider cross-functional teams. Engage legal due diligence, tax due diligence, and other functional teams. Cross-functional data contributes to multi-dimensional reviews and more valuable insights.
• Use software for due diligence. Let DD teams collaborate in a secure and intuitive environment with crystal-clear Q&A workflows, access permissions, built-in redaction, and other helpful features.

Request due diligence documentation

The following practices help businesses simplify data ingestion during the IT assessment:

• Sign NDAs. Dealmakers typically sign formal non-disclosure agreements to ensure data privacy before initiating due diligence.
• Establish clear communication channels. Negotiate the collaboration channels with the selling party to avoid misunderstandings and “hiccups.”
• Develop a due diligence technology checklist. Checklists help communicate due diligence demands to the sell side. 
• Standardize the diligence review. Negotiate preferable file formats for document analysis, like PDFs, to avoid time-consuming file conversions during document reviews. Thankfully, some virtual data rooms automatically convert popular formats to PDFs.

✏️ Learn how to choose a reliable and secure data room for due diligence.

Comprehensive technology due diligence checklist

Here is an information technology due diligence checklist covering the following categories:

1. IT strategy
2. Technology governance
3. Technology financials
4. IT infrastructure
5. Software systems
6. Security posture
7. Legal matters

Important note: The following checklist fits a broader due diligence process and supplements other due diligence areas, such as financials, human resources, governance, operations, etc.

IT strategy

• Strategic IT plan
• IT roadmap
• IT investment thesis
• Digital transformation strategy
• Software acquisition strategy
• Technology SWOT analysis 
• Inventory of technology projects and initiatives
• Inventory of IT investments
• Product strategy
• Product management planning mechanisms
• Technology maturity assessment

Questions for IT due diligence:

1. Does the target company’s IT strategy align with its business objectives?
2. How effectively does the target’s IT strategy address market demands and customer needs?
3. How does the target company select, prioritize, and manage IT investments?
4. Does the target company have a feasible technology roadmap?

Technology governance

• IT team structure with key roles and responsibilities
• IT department reporting structure
• Development team skill matrix
• IT department communication policies
• Technology project management policies
• Software development process (if applicable)
• Technology risk management policies
• IT performance measurement standards and metrics
• Business continuity policies and procedures
• Talent management strategies
• Vendor management policies
• Technology compliance roadmap
• Professional code of conduct
• Change management policies and procedures
• Technology controls

Questions for technology governance due diligence:

1. Do the skills and experiences of the target’s IT teams support its business strategy?
2. How does the IT department collaborate with other divisions?
3. What criteria does the target use for technology vendors?
4. Does the target ensure high-quality outcomes of its IT services (if applicable)?
5. How efficiently does the target retain and attract IT talent?
6. Is this company a good investment opportunity?

Technology financials

• Technology-related financial statements for the past 3–5 years
• Technology budget plans
• Technology cost structure
• Digital assets evaluation
• Technology investment plans
• Technology spending forecasts
• Current cost optimization strategies

Questions for tech financials due diligence:

1. What is the IT funding source? Is it external or internal?
2. Are there dependencies in funding sources?
3. How does the target company make investment decisions, and how do they align with its business strategy?
4. Are technology investments profitable?
5. What cost-reduction opportunities are there?
6. What tax implications does technology have?

✏️ Get an acquisition tax due diligence checklist to explore more tax dependencies.

IT infrastructure

• Network architecture documentation
• Network configuration documents
• Server configuration documents
• Storage system documentation
• Infrastructure deployment processes
• Infrastructure scalability and resilience assessments
• Inventory of cloud service systems
• Inventory of on-premise systems
• Inventory of networking equipment
• Inventory of data centers
• Inventory of power equipment
• Inventory of endpoint devices
• Infrastructure equipment documentation
• Infrastructure suitability audit

Questions for IT infrastructure due diligence:

1. Does infrastructure documentation align with field inspections? 
2. What scalability potential does the technology infrastructure have, and how resilient is it?
3. Does the target company ensure business continuity in incident scenarios, like power shortages and environmental disasters?
4. How does the target company upgrade and maintain its technology infrastructure?
5. What are optimization opportunities?
6. Does the target’s tech infrastructure require remediation?

Software systems

• Software architecture documentation
• Inventory of software applications
• Inventory of M&A technology solutions
• Inventory of customer support systems
• Software source code and code documentation
• Software audits
• Technical debt audits
• Software development lifecycle documentation
• Software testing and quality assurance policies and procedures
• Software sunset policies and procedures
• Software maintenance policies and procedures
• Change management documentation
• Inventory of proprietary software applications
• Third-party dependence assessment
• Data architecture and management lifecycle
• Software performance and scalability assessment

Questions for software due diligence:

1. How scalable and independent are the target’s software systems?
2. How do the target company’s operational IT systems support its business strategy?
3. Is source code well-written? What is the level of technical debt?
4. How does the target company manage its software quality?
5. How much does the target depend on third-party components and services?
6. Can software synergies be achieved? Are there ways to optimize the target’s software systems?

Security posture

• Cybersecurity strategies
• Cybersecurity controls
• Inventory of cybersecurity policies and procedures
• Physical security systems
• Infrastructure security systems and measures
• Identity and access management policies and procedures
• Identity verification and access security measures
• Threat monitoring policies and procedures
• Data privacy and security policies and procedures
• Endpoint device security measures
• Cybersecurity risk assessments
• Incident response plans
• Backup and recovery plans
• Data security checks and other cybersecurity audits
• Cybersecurity compliance environment
• Cybersecurity awareness in the organization
• History of security issues

Questions for cybersecurity due diligence:

1. What are the target company’s cybersecurity risks?
2. How does the company handle sensitive data?
3. Does the target company deploy security measures against common attack vectors? How effective are they?
4. Does the company promote cybersecurity awareness?
5. Does the target company have a data breach history?
6. Does the company deploy adequate incident response procedures?
7. Does the target comply with GDPR, CCPA, HIPAA, and other applicable regulations?

Legal matters

• Service level agreements (SLAs)
• Master service agreements (MSAs)
• Software licensing agreements
• SaaS and IaaS agreements
• Data processing agreements
• Inventory of intellectual property rights
• Hardware purchase agreements
• Compliance audits
• Auditor correspondence
• History of technology and data privacy litigations
• Insurance and indemnification agreements

Questions for legal IT due diligence:

1. Are there significant contractual obligations that would impact technology integrations?
2. What legal and compliance risks are there?
3. Are there ongoing technology-related litigations? What are the implications?
4. How will a transfer of ownership impact existing IT contracts and agreements?

Potential risks and red flags in tech due diligence

Based on our observations, security vulnerabilities, obsolete infrastructures, and poor software quality are the most common issues during technology due diligence. Let’s review them in detail.

Security vulnerabilities

Cybersecurity risks are prevalent in M&A. As much as 80% of dealmakers face data security issues. Let’s map cybersecurity risks and red flags to consider during due diligence.

Cybersecurity risks	Common red flags
⚠️ Phishing and email spam ⚠️ Corporate account takeover ⚠️ Ransomware ⚠️ DDoS attacks ⚠️ Data breach	🚩 Insufficient cybersecurity awareness among employees 🚩 Infrequent cybersecurity training 🚩 Lack of two-factor authentication and strong password management 🚩 Delayed or inconsistent software updates 🚩 Lack of network segmentation 🚩 Lack of single sign-on (SSO) 🚩 Lack of cybersecurity audits

Outdated infrastructure

Censuswide has revealed that 46% of 2,000 businesses in the United States, Australia, and the UK use outdated infrastructures dating back to 2010 and even the 1990s. Acquirers should consider the following risks and red flags of obsolete technology.

Infrastructure risks	Common red flags
⚠️ Scalability issues ⚠️ System compatibility issues ⚠️ Integration delays ⚠️ Unexpected remediation costs ⚠️ Security vulnerabilities	🚩 Obsolete operating systems, such as Windows 8 and Windows 10 🚩 Lack of compatibility with the latest tech advancements 🚩 Aging hardware 🚩 Frequent system crashes 🚩 Frequent downtime and network congestion

Software quality

American companies lose at least $2.4 trillion due to poor software quality, including over $1.5 trillion in losses due to technical debt. If not corrected, an acquirer embraces software issues of the target company, including bad code, poor scalability, and downtime. Here is a list of risks and red flags to consider.

Software risks	Common red flags
⚠️ Unrealized synergies ⚠️ Downtime-induced losses ⚠️ Low user satisfaction ⚠️ Reputational losses ⚠️ Data security issues	🚩 Frequent bug reports 🚩 High technical debt 🚩 Performance bottlenecks 🚩 Lack of quality documentation 🚩 Overreliance on on-premise solutions 🚩 High maintenance costs

Key takeaways

• Technology due diligence investigates IT strategies, infrastructures, software systems, cybersecurity, contracts, and agreements.
• Acquirers outline objectives, involve technology experts, and collect necessary materials in data rooms before initiating technology due diligence.
• The most common technology risks are security threats, obsolete infrastructures, and poor software quality.

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Due diligenceUser checklists