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Posted by Cris Miller on Thursday, Jan. 7, 2010 @ 011:35 AM

By Cris Miller

The other day I was reading an interesting article on Defensive Due Diligence by Claudine Cohen, Mendy Dwestel and Andrew Finkle (all from Grant Thornton) in the January 2010 of Mergers & Acquisitions publication of the Association for Corporate Growth.  They make an excellent case for doing sell side due diligence prior to the initiation of the deal.  They say "by performing due diligence that typically covers such areas as accounting, finance, tax, IT and compensation and benefits...prior to going to market the seller can address areas and avoid any unwanted surprises that can adversely affect the valuation and purchase price."  The problem is that, where as these areas are important, they are simple reporting matrix.  Yes get your reporting systems up to snuff but don't miss the important Stuff. The value isn't in the numbers - it is in what causes the numbers to exist.   Doing just part of the diligence is like having a 5 course meal and skipping the entrée.  If there were no product then the numbers would be Zero - thus no reason to do diligence of any kind at any stage.

Performing pre-sale Technology Due Diligence on the product and the market will have a significantly greater impact on the outcome of the deal and the future success of the acquisition or investment. 

No product is perfect.  Know where the deficiencies are.  If it is a software product, know what the software contains...such as what, if any, Open Source exists and what liability may exist with proprietary code or other IP so that when the buyer/investor asks the question, the answer is readily available.  This avoids delays, but more importantly, it avoids opening the discussions to further questions, doubts and trust.  With proper identification remediation activities can be accomplished prior to going to market -whether that is marketing the company for acquisition/investment or marketing the product for revenue and return on investment.  The market could be shrinking, or for that matter dead, and competition could be focused on to the next generation of the technology.   Customers could be in a state of transition.  All these situations will be missed or misinterpreted if you are looking only at historical numbers

Some investment bankers have a tendency not to want to "expose" the product deficiencies.  The diligent ones address the issues early in the conversation in order to either remediate the problem or have legitimate answers for the issues.  Ask and you will receive...ignore and the risk of discovery could be huge and the consequences could cost millions.

Here are just a few of the thousands of questions to ask when performing complete diligence.  The most important part of pre-deal due diligence:

  1. What is contained in the product and product components? 
  2. How old and ‘out of market' is the technology? 
  3. Where does it fit with the advancing technology continuum? 
  4. Are the development personnel capable of advancing the state of the technology?
  5. Where is the competition regarding the existing product? 
  6. What is the condition of the market itself - growing or declining? 
  7. Where are the next revenue opportunities?
  8. Where are the next markets for the product?
  9. Are all the contracts for third party components in compliance?

So when performing "defensive due diligence" cover all the important areas of a business including finance, operations and most importantly, the product itself. After all, that is meat and potatoes on the plate - you know-the important stuff.

Cris Miller is Global Technology Diligence Practice Lead of Sema4 Inc., dba Semaphore (, a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.   You can write to Cris on


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