Selling your tech company? 5 Tech Due Diligence mistakes that kill deals

by | May 28, 2024

The Due Diligence stage of a deal is exciting but also terrifying.  There is a duty of disclosure owed to the potential acquirer, which sets the scene for a productive encounter. However, in our experience performing tech DD at Thought Source, we are astounded at how many CEOs, technology leaders or representative bankers try to purposefully obstruct the tech due diligence process.  We’ve seen it all before, and we’ll definitely see it again! 

First, we’ll look at the top 5 mistakes: 

    1. Hide and seek 
    2. Ignorance is bliss 
    3. Bluff and blunder 
    4. Window-dressing 
    5. Misleading 

Here are our top tips for Tech Due Diligence deal prep in 2024: 

    1. Do your own sell-side Tech Due Diligence first 
    2. Proactively find potential issues and do some homework on mitigation and remediation  
    3. Prepare an overall story but don’t rely too much on PowerPoint 
    4. Understand the potential acquirer’s deal rationale and principal areas of investigation 
    5. Provide easy to consume artefacts and evidence 
    6. Prep the tech leaders for Tech DD sessions 
    7. Follow-up on issues that are found

Let’s first look at those mistakes that can potentially derail your sale. 

Mistake 1: Hide and seek 

The mistake here is hiding information and waiting for the Tech DD team to find it.  Or waiting until a question is asked before going off to find out the answer.   

This is a mistake because everyone will make different assumptions about reality and then spend effort and time in discovery.  During that process everyone involved comes across as guarded, confused and unprofessional. 

Mistake 2: Ignorance is bliss 

The mistake here is not being aware of what an acquirer wants to know, and not preparing adequately with answers and evidence.  

It isn’t blissful to be ignorant.  It is embarrassing.   

Mistake 3: Bluff and blunder 

The mistake here is to bluff and blunder at the Tech DD team to try to limit their access.  Some technology firms believe that their bankers should do this. 

The red flags for us are: 

  • Attempts to declare a particular area of tech as off-limits 
  • Deferring and delaying access 
  • Continued reliance on a top-level deck such as the Management Presentation or Confidential Information Memorandum that describes tech at an elevated level only 
  • Claiming that no one on the tech team is ‘over the wall’ 

This is frustrating and slows down the deal process.  

Mistake 4: Window-dressing 

The mistake here is to clean up the tech at the last minute and write lots of new documents. 

The problem here is that when evidence is sought it won’t line up and it will undermine credibility.  

Mistake 5: Misleading 

The mistakes here are in shades of gray from misleading to outright deceptive.  

At the light end of the scale, there could be inaccurate, incomplete, ambiguous or over-simplified statements being made.  

At the dark end of the scale, there will be misrepresentations and lies.  

The extent of deviation from accuracy and intent both matters.  Honesty is the best policy.   

Tip 1: Do your own sell-side Tech Due Diligence first  

‘Know Thyself’ was one of the maxims prominently inscribed upon the Temple of Apollo at Delphi.  Philosophers throughout the ages have made various interpretations. 

In the context of preparing for a deal, we recommend your own sell-side Tech Due Diligence.  Use our Tech DD checklist to achieve coverage of relevant topics.  Assign a coordinator to drive the discovery work and collate all the findings. 

It can be helpful to obtain an independent perspective.  Tech DD specialists like Thought Source can help you to grade the findings and evaluate their materiality from a potential acquirer’s point of view. 

Tip 2: Proactively find potential issues and do some homework on potential mitigation and remediation   

The set of issues can be presented as an improvement backlog, or more usefully as a themed roadmap.  

The improvement backlog can be mainly problem statements, that are tagged and categorized.    

The themed roadmap re-articulates the issues in positive language within a work breakdown structure.  If there are multiple phases of work, it might make sense to get started and show progress. 

Tip 3: Prepare an overall story but don’t rely too much on PowerPoint  

Building on our earlier tips, now take the sell-side Tech Due Diligence findings and your improvement backlog or plan and put together a story.  

The story can be explained with your own emphasis and selected highlights.  

If you are on a maturity journey, we recommend that you own up to it and say where you are on the journey. 

Tip 4: Understand the potential acquirer’s deal rationale and principal areas of investigation  

If you look at the deal from the acquirer’s perspective, what is the rationale for the deal?  Distinct types of deals will have different implications: 

  • Stand-Alone Business – the acquirer will engage full-scope review with an expectation that a ‘Go to Green’ plan is prepared for all areas that need improvement  
  • Tech Tuck In – the acquirer may be more focused in their review and want your core tech team and key components to be fit into their organization 

If there is a time-to-market imperative, then there will be heightened sensitivity around how long it might take to execute any required remediation.  

If there are a small number of team members who can undertake the ‘heavy lifting’ associated with the M&A then this can also be a key concern, with flight risk and key person dependencies likely to be looked at closely.  A tailored incentive plan can help with the retention of key people.  

If you have a significant customer base that is being acquired, then a collection of analytics about active use and retention will be important to gather.  

Tip 5: Provide easy to consume artefacts and evidence  

The acquirer’s deal team will appreciate a structured approach, aligned with a Diligence Request List. 

Content owners should prepare deal-specific brief PowerPoint decks or summary documents and then link to supporting evidence.  Both summary and supporting details should be provided in the Virtual Data Room (VDR).  

Tip 6: Prep the tech leaders for Tech DD sessions 

We recommend tech leaders prepare for Tech DD sessions by using the PowerPoint decks and summary documents that are loaded into the VDR. 

It is also important to be prepared for expected questions aligned with agenda dot points.  It is reasonable to work towards an agreed agenda with a tech leader appointed as the main spokesperson on each topic.  

At the end of sessions, confirm that information requests have been met, or if extra evidence is needed.  

Tip 7: Follow-up on issues that are found 

We recommend a proactive approach to following up.  Are all the Tech DD areas adequately covered?  Is sufficient information being made available?  Are there any issues appearing that concern the acquirer?  

If there are issues appearing, then these should be tracked and managed.  In a healthy transaction both parties form their own view about the materiality of the issues and factor that into the deal negotiation. 

Learn more about our Tech Due Diligence Services