IT analysis: Software Due Diligence

Software due diligence involves the analysis and valuation of the intangible assets “software” and “software development” in the context of corporate transactions. These reviews and valuations require extensive expertise and are therefore conducted exclusively by highly experienced and specialized consultants.

Through interviews and the use of our sophisticated analytics suite, we can perform a comprehensive analysis of the software even under the time constraints of a due diligence process. With our help, investors can look behind the scenes of hundreds of thousands of lines of cryptic code.

It is recommended to conduct a type of software handover due diligence after closing to compare the developments and changes in the code and documentation with the state of the software as it was at the time of the initial software due diligence.

Often, many months pass between the software due diligence and the new owner assuming responsibility for the software. This helps ensure that the product has not been inadequately developed in the meantime without anyone noticing.

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In general, due diligence refers to an analytical tool used to identify the opportunities and risks associated with corporate transactions. Literally translated, this business term means “due care.” An important function of due diligence reviews is to determine the value of assets.

Software and software development have also become significant corporate assets. Software due diligence focuses on the expert valuation of these specific assets.

Target audiences for software due diligence:

• Investors who need an assessment of software and software development for the purchase of companies or company shares
• Business owners who are preparing to sell their company or wish to gain an overview of their current level of digitalization
• Managing directors and executives (e.g., IT directors) who wish to assess the status of the technologies and architectures in use, as well as ongoing software development projects
• Private equity firms, family offices, and venture capital investors who require well-founded information in the context of M&A transactions
• Auditors seeking support in identifying opportunities and risks in the context of transactions

In summary, the objectives of our software due diligence are as follows:

• Accurately assess the technological level of the software architecture based on facts regarding its impact on the business
• Determine whether the software architecture is designed to align with current technology trends (e.g., cloud-ready)
• Determining whether the relevant developers (by name) are part of the transaction
• Ensuring that the software documentation is up-to-date and comprehensive (covering 20+ percent of the lines of code)
• Identifying where bugs have occurred most frequently in the software or where only a few features have been implemented
• Avoiding risks associated with the loss of know-how due to unplanned staff turnover

GAMBIT’s technical software due diligence is an audit and assessment that provides you with clear insights into the future viability and scalability of existing software assets. Software is a key asset in valuation—not only for companies that develop software but also for those that use in-house software themselves. The future and digital readiness of software development processes (agile with SCRUM) are also part of our analyses. Our service is particularly recommended if any of the following statements apply to you:

• You are looking to acquire a company whose value creation depends heavily on complex, custom-developed software.
• You are considering acquiring a company that produces software products.
• You want to ensure that the use and further development of a potential acquisition target’s software can continue to be economically viable even after the acquisition.
• You want to have the quality and future viability of the software reliably and objectively assessed down to the code level.
• You are interested in whether state-of-the-art methods are used in software development and whether adequate documentation is available.
• You want to identify the relevant developers and ensure that they are included in the corporate transaction.

GAMBIT is the right partner for you when it comes to all these issues.

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At GAMBIT, software due diligence is based not only on the expertise and experience of our consultants, but also on AI support. Using our unique technology and analytics suite, we analyze software directly within the code. An algorithm correlates key aspects such as features, development history, maintainability, extensibility, and existing bugs. This allows us to compare the software’s potential—as factored into the seller’s asking price—with the technical and organizational reality.

Our experts summarize the analysis results in a transparent manner in the form of a software due diligence report. This provides investors with new insights to better evaluate upcoming transactions and their long-term viability.

Compared to traditional IT due diligence solutions, the GAMBIT approach is unique in several respects:

• Greater business relevance, as factors such as scalability and ease of maintenance are also taken into account
• Not a purely technological assessment: the process quality of software development is also analyzed
• Consideration of modern, experimental development methods, including customer benefits
• Existing problems are presented in a way that is understandable even to technically less-savvy audiences (managers, investors)

In an increasingly digitized business world, software and software development are becoming more and more important. As a result, the relevance of software to valuation in M&A transactions is also on the rise. With GAMBIT’s due diligence report, you not only gain transparency into the business applications in use and, if applicable, in-house software solutions. You’ll also learn whether the architecture is designed to keep pace with current technological trends and whether key software development personnel will remain on board.

Particularly when considering upcoming investments in software companies or highly automated organizations, the following insights from our software due diligence are also relevant:

• Maintainability of the software to ensure continued, trouble-free operation
• The software’s ability to be expanded with new features to adapt to changing circumstances
• The interoperability of software assets and their ability to integrate into your own system landscape or product portfolio
• The software’s future-readiness in terms of connectivity, performance, scalability, and the adoption of new technologies (e.g., the cloud)

With these assessment criteria, we make a significant contribution to ensuring the future viability of your investment.

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Another significant, yet often overlooked aspect of software due diligence is the software development processes. From a due diligence perspective, it is of secondary importance whether the company is a software firm or a business with key business processes based on custom software. Rather, the focus is on the following questions:

• Are requirements, functions, and bugs recorded in a structured manner?
• To what extent are users integrated into the bug-tracking process?
• Is there a professional plan in place for implementing new features?
• Are code changes properly documented?
• From a technical standpoint, can new versions be developed, tested, and rolled out quickly?
• To what extent are the mechanisms for software updates and upgrades automated?
• To what extent are innovations geared toward customer value?

GAMBIT’s Software Due Diligence provides answers to these questions and thus creates transparency regarding the performance of software development. This analysis can be conducted, in particular, as part of a vendor due diligence (i.e., by the seller) to provide the potential buyer with reliable information in the virtual data room from the very beginning.

GAMBIT’s software due diligence solution not only provides a factual basis for investment decisions; it is also suitable for one-time or recurring internal analyses of software and its development processes. Among other things, the AI-based approach makes it possible to identify features that require significant development effort but offer little customer value. When considered in conjunction with the extensibility and maintainability of functions, development budgets can thus be allocated in a much more targeted manner.

In addition, GAMBIT provides an estimate of the effort required for necessary investments in quality improvement. The portfolio also includes an AI forecast that highlights upcoming maintenance efforts should no action be taken. Last but not least, the GAMBIT approach allows for a retrospective assessment of the impact and efficiency of implemented quality measures.

In addition, our consultants identify the distribution of knowledge within a software project. This helps identify risk factors such as silos of knowledge and a lack of coordinators. It also clarifies what additional expertise is needed to expand existing development teams.

Are you interested in software due diligence with GAMBIT? Schedule an appointment right here in our calendar for a no-obligation consultation, or contact us with your questions—we’re here to help.

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