Software targets: When blended diligence is required
March 14, 2016
PitchBook Dealmakers Column
Software companies have increasingly become prime targets for PE firms. Attractive exit multiples, strong EBITA, and rapid growth and bolt-on prospects for targets in this segment are attracting more attention. However, software companies exhibit a unique risk profile, which may be overlooked using traditional due diligence approaches. When software is the core product, the typical separation of due diligences can leave risks unidentified and exclude opportunities to consider. Diligence teams should address the technical, operational and commercial risks and opportunities within the context of a single due diligence to fully understand all the implications. Blending these components during the diligence will provide insight into the present and future risks that can greatly impact scale and growth. Some examples include:
Technical: Assessing architecture, infrastructure and data impact on scalability and growth scenarios and if (and how much) technology remediation investment is required
Operational: Assessing SDLC and PDLC processes, helpdesk tools, talent and key-person flight risks impact on product strategy, roadmap and velocity
Commercial: Assessing IP, code base, customer acquisition/retention and pricing model impact on adjacent market options and competitive threats
On one target, with aggressive revenue expectations, we were able to help reset revenue and product expansion expectations after careful analysis of their planning efforts, SDLC, bug/fix velocity and skill gaps. This allowed the target to better link its operational maturation with growth plans and lead to a reduction in time required for the PE firm to manage day-to-day activities.