Are you a software entrepreneur planning your exit strategy? If you expect to be looking for investors or an acquirer in the next 12-18 months, you can give yourself a leg up by performing a mock IT due diligence audit on your own company now.
An IT due diligence audit will reveal to a potential investor that you’ve recently “patched up” your company. You’re much better off to put best practices in place that become a normal part of your operations and company IT culture well before your exit. Try to look at your company as an investor will. Going through this effort can have many benefits.
1) Identify Deficiencies
Is there any unlicensed software in use at your company? Take care of it now. Are there any missing non-compete or other employee agreements? You don’t want to be in the position of asking your star software developers to sign something on the eve of the sale of your company, when it’s more important to you than it is to them.
A source code review will almost certainly be done if you’re a software company. It can be well worth it to hire a consultant for a day or two to give you a high level impression of your company’s code. Your consultant’s opinion will most likely be very similar to an investor’s expert. If the news isn’t good, get to work on it now.
Take a good look at your customer contracts. If they don’t address a change of control, you should modify new agreements to specifically allow you to sell the company without the customer’s permission and without the customer’s ability to terminate the contract. Get a lawyer to help.
2) Reduce Expenses
The process of reviewing your business with an outsider’s perspective may help you identify ways to save money. If you examine your important contracts, you might determine that there are cheaper options for web hosting, phone service, etc. Maybe your insurance coverage is more extensive than it needs to be. Consider the terms of any upcoming long-term contracts. Don’t saddle your company with a five year IT equipment lease if you plan to sell out in a year.
3) Be Ready for an Audit
Some things can’t be corrected overnight.
Think about systems that might be audited later. Would you be comfortable if a potential investor audited your security or terminated employee policies for the past 12 months? If not, put good processes in place now so they’ll be fully established by the time they might be audited.
Are you properly accounting for software development and maintenance costs? These are complex issues, and it’s very hard to go back later to make adjustments and have clean, auditable data after the fact. Get it right well before you’re talking to investors, and you’ll be less likely to experience unpleasant surprises or disagreements when it comes to IT-related accounting issues.
If you really need to spend some money to address an IT need, try to do it gradually over the coming 12-18 months. An investor can easily recognize that you starved the company of needed resources to make your profitability look better, but a big expense incurred just before you try to get a deal done won’t necessarily be helpful either.
4) Possibly Receive a Better Price
Fixing an issue you identify in a mock IT due diligence audit usually comes with a known price. You’re close to the situation and understand it better than an acquirer. If an investor finds the problem later, they may be concerned enough to walk away from the deal, and if not, they may want to reduce the price of the deal more than is necessary to address this single issue, since they’ll wonder if others exist. Take care of it now and it won’t be up for negotiation later.
5) Reduce Stress
The due diligence process related to selling your company can be a very stressful time. If you have all of your IT processes documented and running smoothly, it will be one less thing for you to worry about, and will give you more time to focus on the financial and legal issues.
Not every company will need to produce every item in our IT Due Diligence Checklist, but knowing what will be requested of you, and addressing any identified deficiencies, can go a long way towards preparing you for the due diligence process related to your exit strategy. As an added bonus, this preparation will help your company to come across as much more professional than the average takeover candidate.
