Technical Due diligence: Preparing for an acquisition

Technical Due diligence: Preparing for an acquisition

Postby akw » Sun Jun 06, 2010 8:45 pm

A few companies have started to take great interest in acquiring our company - specifically for our software. One company asked basic questions about processes. I know more in-depth questions are coming and I'd like to be prepared.

Any guidance from those who have been through the process on what I should do and how to prepare?
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Re: Technical Due diligence: Preparing for an acquisition

Postby InsideSpin » Sun Jun 06, 2010 10:01 pm

There are a variety of standard things to prepare for and a variety of ad-hoc ones. The ad-hoc ones open up many doors that sometimes delay getting a deal closed so trying to contain them is one of the more important things to work towards. In terms of preparing, some high level directions include:
    Get all relevant documentation in order. Make sure it is at your fingertips, in electronic form and properly organized in terms of currency
    Make sure the team has accurate answers on asset value related questions like use of Open Source. Where possible, you should be able to itemize all use of open source including under which license it is being used. Ideally you would have a 3rd party scanning tool at hand (Black Duck software is one) that can produce unbiased reporting
    Some companies want to have the data on person-years spent developing IP. If this exists in terms of time sheets,etc, having the data on hand helps define the scope of how long it would take to recreate the IP. Obviously the longer the better.
    Workflow charts on how maintenance issues are managed. Charts on how many bugs occur over past few releases, etc. The key point is to be able to demonstrate the nature of the 'burden' they would take on if buying the software

    Readiness for globalization (language). Always more than just multi-byte support, how well is the software designed to accommodate alternative language types. It's uncommon to come across something fully prepared, but how close you are in time estimates is important if the acquirer is larger and location is a needed short term deliverable.

I would always ask for a DD list early on so I can prepare. It often contains a few hundred items but allows you to look for the ones that would take the team time to organize. You can also look for ones that are not relevant (larger companies have standard DD and don't often prune before handing out). Take time to tell them which ones are not relevant to shorten the list down. If unclear, go through it as well to make sure you and the team don't start working on the wrong answers.

Keep in mind the end goal is to document 'reps (representations) and warrants' which is essentially the management team's statement about everything being truthful and what is known with certainty and what is still unknown. The amount of risk, which often feeds into the size of Escrow set aside during the deal negotiation, hinges on how complete the DD is and what level of reps and warrants the management team is willing to sign up to.

I hope this helps.

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