January 19, 2019

5 Aspects of a Software M&A Due Diligence Checklist

Rob Griggs

Rob Griggs
Senior Vice President/Corum Group

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A comprehensive due diligence process is a key stage when selling a software company, as you painstakingly walk the buyer through every aspect of your company. This process is driven by a checklist that will be overwhelming at first and exhausting by the close of the transaction. However, it is critical—a job well done saves time and money, all while giving you the opportunity to increase your value to the acquirer by being professional, detailed, and thorough. On the other hand, a job poorly done can actually kill the transaction.

No matter who your buyer is, they will use a due diligence “checklist” that outlines the details of your company. While lists will differ depending on the nature of the buyer and the transaction, there are some consistent pieces of information that every company will want to have ready. Remember, it is always easier to stay ready for due diligence than it is to get ready. I have an 11-page, single-spaced list I’ve been using and evolving for over 30 years. It has 187 categories with significant detail and multiple items within each one. Here are some of the key sections of that checklist.

 

1. CORPORATE AND LEGAL STRUCTURE

   

This section includes any articles of incorporation; by-laws for the company; minutes for board, committee, and shareholder meetings; any relevant information about subsidiaries and affiliates if they are necessary; and a cap table/shareholder list. Keep this info together and updated.

 

2. FINANCIAL

 

This means your most recent three-year projections as well as at least three years of past financial results, monthly sales projections, any consultant or accountant reports, and notes about what the practices have been like at the company and how they have changed.

 

3. CUSTOMERS AND CONTRACTS

 

This includes a list of your top customers, a breakdown of revenue by customer, as well as churn (where applicable). It may include guarantees and warranties provided for customers and contracts that you have with suppliers and other parties to distribute the products. This also includes partnership documentation; joint venture, research, and development agreements; and agreements about the company’s ability to pay or declare dividends. Later in the process, but no less critical, are your customer lists and the contracts related to them. Keep these current, as consistent as possible, and try to avoid having “assignability” rights to approve any “change of control,” which can stop a sale.

 

4. EMPLOYEES

 

Employees are key assets of every software company, so be sure to keep all employee records current, present, and accounted for. This section of the checklist includes:

  • Management organization charts
  • Key staff bios
  • Compensation plans (pension, options, profit sharing, deferred compensation, and retirement)
  • Documents about any labor stoppages and disputes
  • Confidentiality agreements with employees, if you have them, will also need to be included in this section.
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5. INTELLECTUAL PROPERTY

 

This includes any copyright, trademark, patents, etc., that the company has in process or has done. You will need to include a list of your product line offerings and the market share. You will also want to keep an analysis of your inventory, including turnover and obsolescence. Any backlog analysis that you have going on will also be incredibly important to include here.

Up-to-date records for any and all IP will be another key factor in a successful due diligence process. Keep patents, trademarks, business, and marketing plans as current as possible. Having your code well-architected and reviewable is important to this category, too. Be ready to respond to the deep dive into all things IP, and the better-prepared one is, the easier this challenging process will be.

Comments? You can contact me directly via my AdvisoryCloud profile.

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