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:
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.
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.
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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