Tech Risks in SaaS M&A Transactions

Buyers...always beware when conducting due diligence

Hey Founders & Friends!

In this week’s newsletter, we wanted to share some insights on the due diligence process, and highlight some key risks that buyers should look out for during tech due diligence. Depending on the complexity of the software co that you are buying, seeking a 3rd party for tech DD can minimize the potential risks. Some key areas to focus on are:

1. Software quality

   • Considering a software companies value is largely based on it’s technology and IP, examining it is critical during the due diligence process.

   • Quality issues are almost a guarantee for most software companies. Poor quality code both structurally & architecturally will have vast impacts on the future development and growth of a software business.

   • High-quality code will allow the company to focus on future product and feature development rather than spending time managing technical debt.

   • Code that is developed by a third party should be a big red flag for a buyer and extra due diligence should be taken to ensure the codebase is of sufficient quality.

2. Legal

   • Copyright laws also do apply to software and it is critical for a buyer to evaluate any licensed or 3rd party software during the due diligence process.

   • Using third-party code without complying with licenses can lead to lawsuits, loss of IP, and potential issues with a divestiture of the business.

   • Buyers should also seek out details on any past, present or future royalty obligations related to the technology stack.

3. Security

   • Security is a growing concern for software M&A and cybersecurity concerns should be properly evaluated by prospective buyers.

   • The Solarwinds mega-breach, is just one example of many software security breaches that have occurred so far in 2021.

   • PE firms and other software buyers often seek out cybersecurity consultants during the due diligence process.

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Favorites from the Ecosystem

Investors👇…..

Mike Speiser @laserlikemike

Go slow until you have a great product. Then go fast. The economic efficiency gains from a great product compound everywhere. If you go fast too early, you will fail. Once you have nailed product, go so fast that it scares everyone. If you don’t go fast enough, you will fail.

Jason ✨BeKind✨ Lemkin ⚫️ @jasonlk

Datadog is the latest Cloud leader to grow faster than ever It's now growing 75% at $1.2 Billion in ARR!! The key? Getting customers to buy 4+ products 5 Interesting Learnings: 🔽🔽🔽🔽🔽

Founders👇…..

Murtaza Bambot ❤️ @MurtazaBambot

I used to STRUGGLE to raise money. But in the last year, I've: • Raised $700,000 • Turned down $1.1MM • Helped other founders raise $20MM Here's what I changed 🧵

KP @thisiskp_

Running into a deadend in your technical co-founder search? Screw that Just use no-code tools and see for yourself if there's enough demand for your idea. And build it in public. That will give you 10x higher change of attracting a CTO

Operators👇….

AbdulGaniy Shehu 📈 @thatcontentguru

Want to increase conversions for your SaaS product? Here is the easiest way to make that happen using content marketing. Let's get to it... 🔽🔽🔽

Sahil Bloom @SahilBloom

How to find (and operate in) your Zone of Genius:

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End Note 🔚

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