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  • Writer's pictureAgu Aarna

How Vendor Due Diligence Seals the Deal for Tech Companies

Seal in the Water
Seal the Deal

In the final stages of preparing a tech company for acquisition, thorough technical Vendor Due Diligence (VDD) can be the decisive factor that streamlines the acquisition process, mitigates risks, and potentially increases the final sale price. For private equity firms and strategic buyers, VDD ideally provides a detailed and transparent view of the tech company’s value, bridging the gap between perceived and actual worth. In this post, we will explore the components of a technical VDD, its importance for tech companies, how to utilize the VDD report to prepare for buyers and investors, and what success looks like when leveraging the VDD report effectively.

In This Blog You Will Learn About:

The Essence of Technical Vendor Due Diligence

Technical VDD is a comprehensive review conducted to assess the current and planned state of a company's technology landscape. It serves as a cornerstone in the tech acquisition process, offering a clear and detailed picture of the company's technical capabilities, ongoing initiatives, and future plans. Here are the essential components of a technical VDD you - a business executive and/or owner - need to consider to get the most out of the process:

1. Outline of the Current and Planned State of Your Business' Tech

This outline provides a comprehensive snapshot of where your technology stands today and where you intend to take it. It outlines the current technological infrastructure, platforms, and tools in use, as well as the strategic direction and future technology goals. This helps potential buyers understand the long-term vision and technological roadmap of the company.

2. Main Technical Initiatives Currently Ongoing

Highlighting the main technical initiatives underway shows potential buyers what steps you are already taking to reach your planned state. This includes projects, upgrades, and enhancements that are currently in progress, demonstrating a proactive approach to technology development and a commitment to continuous improvement.

3. Gap Analysis Between Planned and Current State

The overarching gap analysis identifies the discrepancies between the current state of your technology and your future goals. It outlines the activities and associated costs necessary to bridge these gaps. This section is crucial for buyers to understand the investment needed to achieve the planned technological advancements and the feasibility of these plans.

4. Justification of Any Planned Activities to Attain the Planned State

This component provides a rationale for the planned technological investments. It allows investors to comprehend why certain initiatives are prioritized and how they align with the overall business strategy. Justifying planned activities helps in building investor confidence in your technology strategy and its potential impact on the company's growth.

5. Opportunities to Get to the Planned State Faster

Highlighting opportunities to accelerate the journey to the planned state indicates to investors what levers they can use to expedite development. This may include strategic partnerships, additional funding, or technological collaborations that can fast-track progress or even open additional avenues for value creation.

6. Details Supporting Planned Activities

This information supports the need for planned activities by detailing their business impact. It ties everything to the company's business objectives, whether it’s enhancing efficiency, speeding up the implementation of features, or increasing product quality. Providing detailed support for planned activities underscores their importance and relevance to the company's success.

Utilizing the VDD Report to Prepare for Buyers and Investors

Once the technical VDD report is completed, it serves as a vital tool for preparing for interactions with buyers and investors. Here’s how to effectively use the VDD report:

Align with the Strategic Direction of the Company

Review the VDD report thoroughly to ensure that the outlined technology roadmap aligns with the strategic direction of the company. This alignment is essential to present a coherent and unified vision to potential buyers and investors.

Understand the Reasoning Behind Initiatives

It’s crucial to understand the reasoning behind each technical initiative detailed in the VDD report. This enables you to speak intelligibly about the initiatives in front of investors, demonstrating deep knowledge and confidence in the company’s technology strategy. Additionally, it helps you traverse the entire dependency tree of your product development, allowing you to anchor strategic direction and plan steps to achieve the next phase of growth.

Tie Costs and Activities to the Information Memorandum

Ensure that the costs and activities highlighted in the VDD report are integrated into the information memorandum (IM), the initial company outline document shared with interested buyers. This integration provides a consistent narrative and helps potential buyers see the full picture of the company's technological and financial landscape while also allowing them to double click into the tech domain via the technical VDD if necessary.

Success Criteria for Utilizing the VDD Report

Effectively leveraging the VDD report can lead to several successful outcomes in the acquisition process. Here’s what success looks like when utilizing the VDD report adequately:

Justifying Your Tech Strategy Without the Need for Additional Due Diligence

A comprehensive VDD report can provide all the necessary information to justify your tech strategy, potentially eliminating the need for further buy-side technology due diligence. This saves you and your team weeks of effort and distraction, allowing you to continue focusing on running your business.

Disarming Investors' Levers for Price Negotiation

By proactively and strategically addressing potential concerns and providing detailed, transparent information through the VDD report, you minimize leverage points for negotiation. This ensures you get a fair price for your business in case of a transaction, reflecting its true value.

Focusing on the Strategic Background of the Transaction

With a thorough VDD report, you can concentrate on the strategic aspects of the transaction instead of getting bogged down by technical details. This strategic focus enhances the likelihood of a successful transaction and sets the stage for effective value creation post-transaction.

Conclusion

In summary, technical Vendor Due Diligence (VDD) is a critical step in preparing a tech company for acquisition. It provides a detailed overview of the company's current and planned technological state, ongoing initiatives, gap analysis, and justification for planned activities. Utilizing the VDD report effectively can streamline the acquisition process, mitigate risks, and potentially increase the final sale price. By aligning the VDD report with the strategic direction of the company, understanding the reasoning behind initiatives, and tying costs and activities to the information memorandum, tech companies can present a compelling case to buyers and investors. Ultimately, a well-executed VDD can seal the deal, ensuring a fair price and successful transaction.

 

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