Commercial Due Diligence IT & Software

How does a Commercial Due Diligence work in the IT industry?

Basically, a Commercial Due Diligence in the IT industry runs very similarly to other industries: we examine the company's value creation as well as markets, customers, competition, risks and growth opportunities.
However, in the case of IT service providers, the exact definition of the service provided often has to be determined in advance. Thus, here we focus more on the business model and the competencies within specific service categories.

In the area of software, two aspects in particular play a special role:

  1. We assess the portfolio of software products or corresponding services. The license model, for example, plays a special role here: To what extent do the contracts lead to recurring revenues, for example through maintenance contracts? Or: To what extent is the software capable of being offered via the cloud (for example, as software-as-a-service) - or is it already being offered? Migrating software products to the cloud can mean an attractive increase in value for the entire company.
  2. In addition, the assessment of the skills available in the workforce plays a major role in IT because of the special expertise that is often in particularly high demand on the market. This also includes recruiting processes, motivation programmes and employee surveys. The growth prospects of an IT company often depend to a large extent on the ability to recruit new employees and retain existing ones.

In the case of suppliers of IT hardware, their supply relationships, price conditions in purchasing and access to goods are also relevant.

The Commercial Due Diligence in IT is often supplemented by a Technical Due Diligence. In the case of software companies, for example, a Technical Due Diligence evaluates technical aspects ranging from the development process and the architectures and technologies used to the quality of the source code.

Why does it make sense to hire an expert for the Commercial Due Diligence of a company in the IT industry?

In the IT industry, there are special business models that require a technical understanding and an overview of the industry. For example, license agreements for software differ from conventional purchase agreements for manufacturing companies. The growth of a software company often depends on the availability of employees, in addition to market demand. And the market is driven by trends that need to be looked at in a differentiated way in relation to the respective company.
This is where an external consulting firm with experience in the IT sector can help, as it has access to relevant data and market information, and can provide objective insights.

What documents does CODEX Partners need to start a CDD of an IT company?

The topics CODEX Partners deals with in depth during a Commercial Due Diligence mainly concern the distribution of the business across different target industries. This includes, for example, the regional distribution of the business, the development of sales with top customers and details on business planning. For all these topics there are evaluations and management reports in the company, which should be made available to us as electronic files at the start of the CDD.

How long does the CDD take for an IT start-up?

The duration of a CDD for IT companies depends only to a certain extent on the size of the company, be it an IT startup or a more mature company. Rather, what counts is the scope of analysis that is to be covered. The typical duration of a Commercial Due Diligence in the IT sector is about 4 weeks. In the case of a CDD that is commissioned by the seller of the company, rather 6 weeks should be planned for, as often revision loops are still required. One of the reasons for this is that experience shows that the company data is not yet complete at the beginning.

When should IT companies aiming to sell in the medium term start with a CDD?

As a rule, a Vendor Due Diligence commissioned by the seller starts 3-6 months before the start of the divestment process. Ideally, the VDD should take place in parallel with financial due diligence.

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