Due diligence is the systematic, in-depth process carried out by a party to validate claims made by a company targeted for an investment, loan, merger or acquisition. The classic due diligence covers areas such as finance (P&L, Balance Sheets, capital structure), sales and marketing (top customers, strategies and tactics, revenue models), human resources (organization structure, management, incentives, turnover), legal (lawsuits, intellectual property, insurance) and other business plan related items. Noticeably absent from the typical list is technical due diligence. This is all the more disturbing as many of the firms that are targets for merger or acquisition are technology-based companies – firms where technology is either the product or plays a key role in delivering their products or services.

To argue in favor of including technical due diligence in the broader process requires that we examine the main goal of due diligence in the first place: to reduce the risk of the proposed transaction, by ensuring an informed decision. While many of the risks come from the business and operations side of the house, technology companies are especially vulnerable to technology risks. Examples include:

- Risk that the core technologies owned by a company are not competitive
- Risk that the resources to develop and deploy technologies will not be sufficient
- Risk that organizational and technical impacts of the merger integration are not adequately planned for

How then would a technical due diligence reduce these and other risks? The answer lies in the nature of what comprises a technical due diligence: the review and analysis of a company’s technology development, deployment and operational capabilities, both from an intellectual property and a human resources perspectives. Elements of this are indeed part of the classic due diligence process. However, without special skills, knowledge, and method, the results are often mediocre.
What does it take to carry out a competent technical due diligence? Here are five essential ingredients:

- A sophisticated methodology and ability to discover and analyze facts and content coming from both the company under consideration as well as from other participants in the same sub-industry.
- A solid knowledge of the state-of-the-art and state-of-the-commerce in the relevant industries and markets, including current and anticipated trends.
- An objective and independent viewpoint, with no vested interests in any of the potential outcomes of the investigation.
- A wealth of management and technology management experience.
- Finally, superior synthesis and communications skills to bridge the inherent gap between technology concerns and those of the business people in charge of the transaction.

In the next installment of this three-part series we will examine the components of a solid technical due diligence report.

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Sergiu S. Simmel has been affiliated with The Mercator Group since 2000. He is the Principal of Clepsydra Systems, and has successfully combined executive leadership, entrepreneurship, technology and senior consulting over the course of his 20-year career in the software product and software-based services industry. He often works with financial institutions and management consulting groups on technical and operations due diligence assignments.