4 ways a CTO can ace a due diligence process

Due diligence processes can be intimidating, even to an experienced CTO. There is a lot riding on personal performance during the process, and time to close a deal is often short. A CTO´s performance can, psychologically speaking, strongly influence the monetary evaluation of the company. 

Questions asked by potential buyers – or, more frequently, the consultants they have contracted – can be tough and seem unfair. CTO’s usually have a crucial confidence-building role to play in the process, and it’s key that they come into it well prepared.

Here are four things a CTO can think about going into a due diligence (DD) process:

1. Take time to prepare yourself and your organization

• A sale process is easier if you already have your ducks lined up. Make sure that you have the right documentation ready, and that you have the answers available in the meetings with the buy-side team. A lot of material is requested at the start of a DD process, so by making sure that you have up to date documentation that is consistent with your storyline you give yourself a head start in the process.
• To make sure that you have the right answers available, consider inviting key people from your team into the DD process meetings. They can help you take on any detailed questions that you don´t know. It´s a lonely process if it´s just you.
• Doing a proper Vendor Due Diligence (VDD) review in advance of a sales process can help you pinpoint areas that buyers will focus on, and to prepare your senior staff to answer questions in the best way. One suggestion is to complete a VDD about 12-18 months before you go into the process, to give you a chance to iron out the kinks.

What happens if you get this wrong?

At best, you´ll look unprofessional when you don´t have the required documentation ready. At worst, you will end up giving the impression that there may be risks or red flags in the tech organization that do not actually exist.

2. Be constructive about improvement areas

• The buy side consultants will likely press you when they find areas that aren´t “industry standard”. That´s because they need to understand if it´s a risk to the buyer. In this case, it helps to have a prepared set of answers.
• No organization is perfect. When asked about areas that aren´t up-to-scratch, your best defense is to (a) demonstrate you know about it and (b) show how you are working on it.
• In some cases, systems are designed to be suboptimal. For instance, the banking industry has heavy regulatory and data privacy burdens which mean that infrastructure solutions are often not “best in breed” compared to other industries. That´s fine – just explain things within the context of your own industry.
• Don´t get defensive, beyond reasonably stating your case. Being difficult, or obtuse, in the expectation that a problematic question will go away, will constitute potential grounds for a red flag.

What happens if you get this wrong?

Well… we´ve seen CTO’s get fired for this one. PE firms want grown-ups in the room.

3. Highlight the key strengths of your organization

• It might sound obvious, but given the large amount of information covered in a DD process, there might not be any natural opportunity for you to highlight what you think are the key strengths of your organization. Asking for an opportunity to briefly give your view on this helps you showcase your strengths but also contributes to the impression that you know your current position.
• Be aware that highlighting your strengths could result in these areas being discussed less in the rest of the process. This is not a bad thing, but could rather be a testament to the counterpart being satisfied with the information or simply prioritizing other areas. Therefore, you should not push the conversation back to your strengths unless it is relevant for the discussion. Also, in line with point number 2, never defend an improvement area by countering with an unrelated strength.

What happens if you get this wrong?

This one isn´t so bad. If you have a good organization, it should shine through without too much effort. It´s a shame not to put your best foot forward, though.

4. Understand context within best practice

• This one sounds weird but bear with us. Let´s illustrate with an example. Many outfits these days claim to work agile, or in an agile fashion because it is popular to do so. However, it is often not true. There are usually significant deviations from “pure” agile methodology present in most organizations. This is either because they are still in the process of moving to agile, or because their industry demands some deviation. Nothing wrong with that – just understand and articulate the context within which your organization is working. That is your role as CTO – make your choices, explain your choices. It´s up to a buyer whether they think those choices are correct, and there is not much you can do to influence that beyond demonstrating competence.
• Similarly, don´t try to go to agile just for the sake of it. Waterfall is a great development model for development that is already mapped out (as in, you know what the end result should be). Agile is better when you need to experiment with what works and what does not. But that does not mean you automatically need to start adopting agile for the sake of it.
• Don´t hide behind best practice as an excuse for incompetence. We´ve heard many variations on this one. “Agile means we don´t do roadmaps beyond next month.” “We can´t set deadlines because we´re so flexible we continuously change scope.” And so forth. Real competence in development shines through, and incompetence will be flagged.
• Finally, be careful of marketing words. “State of the art”, “machine learning” and “artificial intelligence” might be great to have in a brochure but be prepared to defend the use of marketing words in a due diligence. As a knowledgeable source once wrote to the Economist magazine (and we´re paraphrasing): “artificial intelligence doesn´t exist until a machine refuses to be turned off.” And we presume that´s not just because the “off” switch doesn´t work.

What happens if you get this wrong?

Getting this one wrong will complicate the conversation you have, and potentially make you sound less professional and experienced.

So, there are four things to think about. If you would like to find out more about how we can help you prepare to shine in a due diligence process, feel free to contact us!