Information technology (IT) due diligence is the process of investigating and understanding a company’s IT systems, most often before a merger or acquisition (M&A). IT due diligence ensures companies understand all IT risks, assets, and liabilities prior to the M&A.
IT due diligence is a complex process, typically involving an in-depth audit and analysis of IT components such as security and disaster recovery. Learn more about technology due diligence in this guide.
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What Is IT Due Diligence?
Companies considering a merger or acquisition must perform necessary due diligence to ensure they have a clear picture of a company’s potential risks, assets, and liabilities. This ensures a company has all information they need to make sound decisions regarding the purchase of another company.
IT due diligence involves an audit and analysis of all information technology systems, components, and processes, including, but not limited to:
- Disaster recovery
- Hardware and software
- Monitoring and management
- Data retention
- Business continuity
- IT compliance
While IT due diligence is often performed by the buyer in an M&A, the sell-side may also perform due diligence proactively to prepare for a sale.
Why Is Due Diligence Important for IT Projects?
There are many reasons why companies must perform information technology due diligence:
Helps buyers understand the company’s IT value
Due diligence ensures buyers understand the true value of a company before signing on the dotted line. IT due diligence uncovers the value of a company’s tech systems and components, including data and physical hardware.
Uncovers potential IT risks
Due diligence uncovers potentially damaging risks, such as faulty security processes or even an out-of-date tech stack. Understanding these risks helps buyers to better negotiate a purchase price. It also allows the seller to mitigate risks that better position the company for a faster sale.
Assists buyers and sellers with improving their cybersecurity
Security must be a top priority for all companies, especially during an M&A. Due diligence helps companies uncover and fix potential security risks to best protect their business-specific data, critical customer information, and intellectual property (IP).
Highlights IT areas that need improvement
IT due diligence highlights areas of a company’s tech infrastructure that need improvement, such as outdated software. As a result, the buyer of a company can plan for these improvements and allocate the budget proactively.
Other Types of Due Diligence
IT due diligence is only one form of due diligence required during an M&A. Other forms of due diligence include:
- Financial due diligence: An audit and analysis of a company’s finances, including current and historical financial performance.
- Legal due diligence: An audit and analysis of a company’s legal components, including contracts, employment processes, and potential lawsuits.
- HR due diligence: An audit and analysis of a company’s HR processes, including hiring, employee experience, and overall management.
Best Practices for Due Diligence Procedures
The IT due diligence process is complex. However, there are some basic best practices companies can use for a successful review of company materials and technologies:
Set clear technology due diligence goals
Companies should set clear goals before starting the technology due diligence process. This includes highlighting what the company wishes to gain from the process and timelines for completion. The IT due diligence process can take anywhere from a few weeks to a few months, depending on the size of the company and other factors.
Choose an IT due diligence team
Companies should compose a team to lead due diligence efforts. This team should include key stakeholders, including IT leaders such as CIOs or CTOs, as well as IT team members such as developers. Other key players may include the company’s attorney and an IT consultant.
Utilize an IT due diligence checklist
An IT due diligence checklist can help companies through each step of the process. These checklists outline each step in detail, from setting goals to reporting findings.
Implement a virtual data room
During the due diligence process and throughout the M&A, confidential data must be readily available for both the buyer and the seller. A virtual data room (VDR) or deal room can be used to store and share this sensitive business information securely.
All sensitive data pertaining to IT, including copyrights, security frameworks, customer information, disaster recovery plans, and contracts can be stored in the VDR. This makes the process of compiling and sharing due diligence data simple.
Companies can also share contracts and other agreements via the VDR. This enables companies to complete M&A deals virtually.
Compile clear documentation
Documentation is critical for due diligence. Documentation enables a seller to “show their work” and the buyer to verify seller claims. Companies should compile clear documentation, including, but not limited to:
- IT vendor contracts
- IT process documents, such as those explaining disaster recovery or software implementation processes
- Cybersecurity event documents, such as those reporting past breaches
- An inventory of current hardware and software assets
Interested in learning more about how to prepare for a merger or acquisition? Check out this guide: Mergers and acquisitions: Resources for a smooth IT transition