An Effective IT Due Diligence Process

ByJim Hoffman

IT due diligence is the process of investigating a technology company that is the target of a potential acquisition, merger or investment. IT due diligence often comes near the end of the overall due diligence process. Typically, financial and legal issues are the first priority.

Initial Contact

Once the transaction is far enough along to conduct technology due diligence, the first step is to establish contact with the target company. This is typically a senior executive. I prefer to have a phone conversation with this person to gather some high-level background information on the target company, schedule a site visit and determine the appropriate technical contact. Prior to the call, I gather my own information from the target company's website, Google, LinkedIn and any relevant information that may have already been gathered during legal and financial due diligence.

In addition, this is the opportunity to establish a "cover story" for the site visit. Since in most cases the transaction isn't public knowledge, you'll need to be on the same page as your executive contact as to why you're there. Typical explanations are "we're exploring a business relationship," "we're considering a partnership" or "the owners wanted an independent review of our technology." Whatever is decided, be sure that if you'll have a future relationship with the staff at the target company that the cover story isn't an outright lie, as that's certainly a poor way to begin your relationship.

You'll also want to gain an understanding of who at the target company has knowledge of the transaction (so you can speak freely with them) and who doesn't.

Technical Contact and Submission of Due Diligence Requests

After your initial contact with the target company, your next step typically is to reach out to a designated technical contact and provide them with a list of due diligence requests. Some people question whether this gives the target company a chance to "clean up their act," but in my experience it makes the process go much more smoothly. You can hit the ground running with more information when you arrive for the site visit, and you will probably still be able to tell if anything has been patched up just before your arrival.

Comprehensive due diligence checklists are available online, and you should add, remove and edit questions as required for the specific IT due diligence effort.

The Site Visit

For a small acquisition, the site visit will probably only last 1 - 2 days. Even if it's longer, the daily process is the same. You'll want to obtain more detailed information based on the previous information you've received, either through the due diligence requests or your on-site observations and interviews. I typically spend the evening of each day onsite reviewing my notes and using them to create followup questions.

During the site visit, you should also be able to meet with key IT staff members, or even all of them if the company is not too large. If appropriate, you'll also want to schedule product demos and set aside time for technical presentations from the technology staff on architecture, database layout, etc.

Do your best to keep things moving quickly. Remember the reason you're there - to get as much valuable information as quickly as possible.

The Due Diligence Report

After the site visit, you'll want and need to create a final report that details your findings. Sample report templates are available on the Internet. During the process of creating the report, it's normal to have followup questions for your technical contact. The report should be written for the intended audience - normally business or financial executives. Avoid being overly technical if at all possible.

Jim Hoffman has over twenty years of experience in technology companies in the healthcare, financial, telecommunications and leisure industries. Throughout his career, he has been called upon to lead many due diligence efforts, including mergers & acquisitions on both the buy and sell side. He has held numerous senior management and executive positions, and is currently the Chief Technology Officer at Besler Consulting.

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