Technical Due Diligence (TDD) Checklist – When and How to Perform One

Introduction

A strong business plan is crucial in today’s rapidly evolving business landscape. However, the strength of your business plan relies heavily on the technology that underpins it. This is where Technical Due Diligence becomes essential, particularly when potential investors, merger partners, or other stakeholders request it. TDD isn’t reserved for tech experts; it’s a vital consideration for anyone exploring a business opportunity in our digital era.

Technical Due Diligence is like a detailed check-up for your tech companies’ technology environment before getting investments. It looks at things like how your product works, the quality of your code, and any possible problems. It’s all about making sure you make smart decisions before getting money. Requesting and initiating the Technical Due Diligence process at an early stage is highly advisable. Doing so can lead to significant cost savings, reducing project expenses by up to 20%.

Document every finding carefully. Use specialised software to look at the data, as doing it by hand could lead to mistakes about 30% of the time. It helps you spot strengths and weaknesses in the system, before allocating your budget and investments. Did you know that 75% of start-ups fail because people skip this step? So, let’s get into when and how Technical Due Diligence works.

 

The Growing Necessity for Technical Due Diligence

In the journey of a business, from seeking investments to pursuing mergers or buyouts, Technical Due Diligence serves as a guiding light. It offers a clear view of your technological landscape, helping you secure investments, prominent your competitive edge, and navigate complex business transactions.

As companies increasingly rely on technology for their operations, ensuring the reliability and security of their technical assets has become essential. Here, we explore why TDD is becoming more necessary than ever. Let’s explore all the important points!

 

a) The Boom in Mergers and Acquisitions

According to the Global M&A Report by Merrill Corporation, there were over 19,000 M&A deals in 2019, totalling $3.9 trillion in value. In such high-stakes scenarios, Technical Due Diligencehas become essential to assess the technical health of a target company. With due diligence, companies can avoid inheriting technical debt or faulty architectures, thus safeguarding the investment’s long-term value.

 

b) Growing Complexity of Software Architectures

Software architectures have become increasingly complex with the rise of cloud-based solutions, IoT devices, and advanced AI technologies. Gartner has estimated that by 2023, over 75% of global organisations will be running containerised applications in production. This growing complexity necessitates a comprehensive Technical Due Diligence process to evaluate these evolving architectures’ scalability, reliability, and maintainability.

 

c) Regulatory Requirements and Compliance

The introduction of stringent regulations like GDPR in Europe and CCPA in California has put data protection under the spotlight. Non-compliance could lead to fines up to €20 million or 4% of annual global turnover under GDPR. Technical Due Diligence serves as an effective tool to review and validate a company’s adherence to these and other regulations, thus avoiding severe financial repercussions.

 

d) Business Competitiveness and Innovation

A report by Deloitte highlights that 40% of executives believe digital transformation is a “matter of survival” in today’s market. Technical Due Diligence can showcase a company’s an edge by identifying areas for technological innovation. Through due diligence, organisations can gauge how adaptable their systems are for future trends, ensuring they stay ahead of the curve.

 

When You Need Technical Due Diligence

When it comes to making smart decisions in the tech world, having TDD (technical due diligence) can be a game-changer. It helps you avoid costly mistakes and ensures your investments are solid. Let’s see! When do you need Technical Due Diligence?

a) Early-Stage Startups and Seed Funding

For startups in their infancy, Technical Due Diligence may not be the first priority. However, it shouldn’t be overlooked. Conducting a preliminary Technical Due Diligence before seeking seed funding can establish a strong technical foundation. It sets a precedent for operational excellence, allowing the startup to attract initial investors with greater confidence.

b) Mergers and Acquisitions

In addition to already established points, M&A activities necessitate a detailed Technical Due Diligence from both the buyer and the seller. The buyer performs TDD to precisely understand what they are acquiring, while the seller uses it to justify their valuation and expedite the acquisition process. This dual Technical Due Diligence process ensures that both parties are on the same page, reducing the risk of post-acquisition complications.

c) Regulatory Compliance Checks

Strict compliance standards govern industries like energy, healthcare, finance, and data analytics. Periodic Technical Due Diligence checks are essential to ensure that the technology adheres to the requisite laws and regulations. This not only helps in avoiding legal repercussions but also boosts the company’s credibility in the market.

d) Preparing for an IPO

When a company is planning for an Initial Public Offering (IPO), a thorough Technical Due Diligence can add significant value. It offers potential investors an in-depth view of the company’s technical maturity, thereby contributing to a more accurate and potentially higher company valuation.

 

Significance of Technical Due Diligence Across Different Phases

Technical Due Diligence is a crucial process that holds immense value throughout various stages of a business’s journey. Whether you are seeking investments, aiming to highlight your technological advantages and competitive edge, or providing evidence of your return on investment (ROI). Technical Due Diligence plays a vital role. Let’s explore why it is essential at different stages!

 

1- Securing Investments

Technical due diligence acts as a foundation when you’re on the lookout for investors. It helps potential backers understand your business’s technical capabilities, risks, and growth potential. Here’s how it aids in securing investments:

• Risk Mitigation: By thoroughly assessing your technology, investors can identify potential risks and challenges, ensuring their investments are well-protected.
• ROI Projections: A robust technical due diligence report provides investors with insights into the expected return on their investment. This helps them make informed decisions about funding your venture.
• Competitive Advantage: It showcases your technological strengths and how they set you apart from competitors, making your business more attractive to investors.

 

2- Highlighting Technological Advantages

You must focus on your technological advantages to stand out in the competitive business landscape. Technical Due Diligence helps you achieve this in the following ways:

• In-depth Analysis: It involves a comprehensive examination of your technology stack, allowing you to showcase your strengths and innovations.
• Validation of Claims: It provides concrete evidence to support your technological claims, assuring stakeholders of the authenticity of your capabilities.
• Strategic Positioning: By highlighting your competitive edge, you can position your business as a leader in your industry, which can be beneficial in negotiations or partnerships.

 

 

3- Facilitating Mergers

When considering mergers, both parties need a clear understanding of each other’s technological assets. Here’s how Technical Due Diligence contributes to a successful merger:

• Compatibility Assessment: It evaluates the compatibility of the technologies of both merging entities, ensuring a smooth integration process.
• Risk Identification: Any potential technical risks that may arise during the merger are identified and addressed proactively, reducing post-merger complications.
• Valuation Guidance: Technical due diligence helps determine the fair value of each company’s technology, ensuring an equitable merger agreement.

 

4- Enabling Buyouts

In buyout scenarios, Technical Due Diligence is essential to assess the value and potential of the target company. Here’s why it’s crucial:

• Asset Evaluation: It provides a detailed assessment of the target company’s technical assets, helping the buyer make an informed decision.
• Due Diligence Report: The findings of Technical Due Diligence form the basis of negotiations and pricing in the buyout process.
• Risk Management: It identifies any technical risks associated with the target company, enabling the buyer to develop risk mitigation strategies.

By conducting TDD diligently, you not only make your business more attractive but also ensure that all stakeholders have a solid understanding of your technological prowess, setting the stage for successful endeavours.

 

What is the Process/Components/Stakeholders

Getting an external viewpoint can provide the final seal of approval. Consult people outside the division of business you are investigating for an unbiased view.

1- Pre-Due Diligence Preparation

• Conducting Internal Audit

Before undergoing external Technical Due Diligence, it’s prudent to conduct an internal audit. This involves identifying your technology’s key components, features, and limitations, preparing you for the questions and scrutiny that will come during the formal TDD process.

• Assembling Documentation

A crucial step in preparation is gathering all relevant documentation. This includes code repositories, architectural diagrams, development and deployment pipelines, and any existing internal audit reports.

 

2- Initial Technical Assessment

• Reviewing Software Architecture

Evaluating the software architecture involves multiple layers of scrutiny. One must look into how the various components interact, the data flow among them, and how they are deployed. Any bottlenecks, security vulnerabilities, or issues with scalability are to be highlighted at this stage.

• Evaluating the Codebase

The codebase isn’t merely about lines of code. It’s about coding standards, reusability, and maintainability. Code should be clean, commented, and adhere to the best practices in the industry. Any tech debt should be quantified because it can significantly impact the cost and timeline of future development.

 

3- Stakeholder Engagement

• Role of Tech Leads and Developers

Tech leads and developers are often the ones most acquainted with the technical details. They can provide insights into why certain architectural choices were made, how they have evolved, and what technical debt or challenges exist.

• Business Analysts’ Contribution

Business analysts focus on the commercial aspects. They look at how the technical components align with the business goals, what kind of customer data is handled, and how it’s protected, and they often translate technical metrics into business KPIs for easier understanding by non-technical stakeholders.

• Legal Compliance and Advisors

Legal advisors are indispensable in navigating the regulatory landscape. Their scrutiny ensures that software licenses are in order, that data handling complies with privacy laws like GDPR, and that there are no impending legal issues that could jeopardise the project.

• Role of Project Managers

Often overlooked, project managers play a vital role in aligning the TDD findings with the project’s timeline and budget. They take into account the recommendations from the TDD and reassess the project plans accordingly.

 

4- In-Depth Analysis and Validation

• Performance and Scalability Testing

Performance and scalability tests should be conducted after the initial assessments and stakeholder inputs. These tests validate the system’s capacity to meet future demands and the feasibility of scaling operations.

• Security Audit and Vulnerability Assessment

A detailed security audit identifies potential threats and vulnerabilities in the system. This step is crucial for protecting valuable intellectual property and sensitive customer data.

• Compliance and Regulatory Checks

Beyond the regular legal framework, compliance checks are especially relevant for industries that have additional regulatory bodies. These could include financial auditing for fintech companies, HIPAA compliance in healthcare, or accessibility standards for consumer-facing apps.

 

5- Final Evaluation and Reporting

A final Technical Due Diligence report is compiled once all the individual components have been reviewed and validated. This document should be comprehensive, covering every assessment aspect, the findings, and recommended action steps. This report serves as the cornerstone for decision-making for investors, acquirers, or internal stakeholders.

 

Checklist of Things to Do

1- Preliminary Steps

• Gather Previous Audits and Evaluations

Before starting with a new Technical Due Diligence, assembling any previous internal or external audits can provide valuable context. These reports may highlight past issues and how they’ve been addressed.

• Initial System Health Check

Use automated monitoring tools to gather baseline statistics. This data can include system uptime, error rates, and average response times, which offer a snapshot of system stability.

2- Expert Evaluation

• Architecture Review

Examine the system’s architectural design, specifically focussing on modularity, fault tolerance, and system scalability. Evaluate how changes to one component might affect others.

• Code Quality Checks

Automated tools can help scan the codebase for adherence to coding standards, reusability, and common errors. This step helps identify whether the code is high quality and maintainable.

• Dependency Analysis

Catalogue the third-party libraries, services, and components that the system relies on. Evaluate their licenses, longevity, and track record for security and updates.

3- Security Audits

• Infrastructure Vulnerability Assessment

Assess the security measures in place to protect the infrastructure. This includes firewalls, encryption, and intrusion detection systems to identify any potential vulnerabilities.

• Data Protection and Privacy Review

Especially vital for businesses that handle sensitive data, this step ensures that the business is in compliance with data protection laws like GDPR or CCPA.

4- Performance Metrics

• Load Testing

This involves simulating real-world loads on the software to test its performance. It can help identify bottlenecks in the system and indicate how it performs under stress.

• Benchmarking

Benchmark the system performance against industry standards or competitor software. This can provide an objective measure of how the software performs in comparison to others in the same domain.

5- Quality Assurance and Testing

• Test Suite Review

Examine the quality and coverage of automated test suites. A comprehensive test suite can accelerate future development by quickly identifying regressions.

• Manual Testing

Even with robust automated tests, some issues only emerge during manual testing. This phase can uncover user experience issues, bugs, or inconsistencies that automated tests may miss.

6- Final Documentation

• Compilation of Findings

Aggregate all the findings into a single, comprehensive report. This should include both the strengths and weaknesses identified during the technical due diligence.

• Action Plan

Based on the findings, compile an action plan outlining the steps for remediation. Prioritise these steps based on their impact on security, performance, and business objectives.

 

Best Practices/Tips

In the realm of technical due diligence (TDD), it’s essential to be armed with the best practices and tips for a successful evaluation. These valuable insights will help you navigate the technical due diligence process effectively, ensuring a thorough assessment of technical aspects.

1- Planning and Preparation

• Start Earlier

Initiating Technical Due Diligence activities early can provide ample time for assessment and remediation. Don’t leave TDD to the last minute, as rushed jobs lead to overlooked details.

• Assemble Core Team

Choose a team of professionals that includes coders, architects, and business experts. A well-rounded team ensures a 360-degree view during Technical Due Diligence.

 

2- Technical Check-up Tips

• Use Code Review Tools

Automated code review tools provide an efficient way to identify glaring issues. However, remember that human input for complex logic is irreplaceable.

• Focus on Key Components

Zero in on the most critical software modules. These usually have the greatest impact on business operations and potential valuation.

 

3- Security Practices

• Ongoing Vigilance

Security measures should be continually updated. Regular audits and vulnerability assessments will help keep your systems secure.

• Encryption Standards

Ensure that all sensitive data is encrypted, both at rest and in transit. This is essential for compliance and risk mitigation.

 

4- Stakeholder Communication

• Transparent Reporting

Be transparent in all reporting stages of the Technical Due Diligence process. This helps build trust and creates a robust roadmap for future actions.

• Educate Stakeholders

Both technical and non-technical stakeholders must understand the Technical Due Diligence findings. Conduct briefings to bridge the knowledge gap.

 

5- Data Management Best Practices

• Audit Data Flows

Analyse how data moves through the system. This can reveal inefficiencies and potential security risks that may otherwise go unnoticed.

• Comply with Regulations

Make sure you are up-to-date with data protection regulations like GDPR. Non-compliance can result in hefty fines and legal complications.

 

6- Documentation and Reporting

• Keep Records

Thorough documentation can be a lifesaver, especially when changes in staff or management occur. Keep meticulous records for future reference.

• Executive Summaries

An executive summary that highlights key findings and recommendations is invaluable. It helps decision-makers quickly grasp the TDD’s implications.

 

7- Post-TDD Follow-up

• Implement Changes

Once the Technical Due Diligence report is out, prioritise and implement the suggested changes. Time is of the essence, especially if critical issues are identified.

• Review and Update

Technical Due Diligence is not a one-off activity but should be periodically revisited. Consistent reviews help to keep your systems updated and secure.

 

Final Verdict: Don’t Skip the Diligence

Technical Due Diligence is a well-impactful point for businesses looking to make informed decisions. In a world where every decision can make or break your business venture, consider TDD very seriously and make your best strategic plans.

Organisations can mitigate risks, identify opportunities, and ultimately optimise their investments by understanding when and how to perform a Technical Due Diligence. It’s crucial to ensure that technical aspects align with strategic goals, providing a solid foundation for future success.

Doing your homework through Technical Due Diligence can save you money and the time and heartache that come with a failed investment. Remember, what you’re investing in isn’t just a business but a future. Make it a bright one!

 

Zartis: The Indispensable Role of Consultancy Services 

Our custom technical due diligence consulting services can make a tremendous difference in the intricate world of Technical Due Diligence and your ROIs. With their unbiased views, domain expertise, and industry experience, consultants can transform a complex process into a streamlined operation.

Rest assured! Because with Zartis by your side, you can tap into different services ranging from scrutinising the codebase and evaluating security protocols to ensuring regulatory compliance. Our goal is to make Technical Due Diligence not just manageable but also effective.

Technical Due Diligence Consulting Services

 

Why Zartis is Your Go-To Consultancy Service for TDD

Zartis offers bespoke solutions designed to meet your specific needs. Comprising a team of seasoned professionals, we have a proven track record in guiding businesses through the complex process of Technical Due Diligence. Our services go beyond just ticking off a checklist. We offer actionable insights that can significantly elevate your business value.

If you’re looking to conduct Technical Due Diligence with the precision it requires, don’t hesitate! Reach out to Zartis today. Our experts are ready to help you navigate the complexities of Technical Due Diligence. Why settle for mediocrity when excellence is just a click away? Contact Zartis now to elevate your TDD journey to the next level.