Section 3.

1 Introduction to Due Diligence

3.1.1 Introduction

Due diligence is the investigation or exercise of care that a reasonable business or person is
normally expected to take before entering into an agreement or contract with another party or an
act with a certain standard of care.

Due diligence can be a legal obligation, but the term more commonly applies to voluntary
investigations. It may also offer a defense against legal action. A common example of due
diligence is the process through which a potential acquirer evaluates a target company or its
assets in advance of a merger or acquisition. The theory behind due diligence holds that
performing this type of investigation contributes significantly to informed decision making by
enhancing the amount and quality of information available to decision makers and by ensuring
that this information is systematically used to deliberate on the decision at hand and all its costs,
benefits, and risks.

Due Diligences used to investigate and evaluate a business opportunity. It implies a general duty
to exercise care in any transaction. Most legal definition of due diligence describe it as a measure
of prudence activity, or

Source: https://dealroom.net/faq/due-diligence-meaning

3.1.1 Development of the term

The term "due diligence" can be read as "required carefulness" or "reasonable care" in general
usage, and has been used in the literal sense of "requisite effort" since at least the mid-fifteenth
century. It became a specialized legal term and later a common business term due to the United
States' Securities Act of 1933, where the process is called "reasonable investigation". Under
Section 11b3, a person could avoid liability for an untrue statement of a material fact if they had,
"after reasonable investigation, reasonable ground to believe and did believe, at the time", the
truth of the statement. The defense at Section 11, referred to later in legal usage as the "due
diligence" defense, could be used by broker-dealers when accused of inadequate disclosure to
investors of material information with respect to the purchase of securities. In legal and business
use, the term was soon used for the process itself instead of how it was to be performed, so that
the original expressions such as "exercise due diligence in investigating" and "investigation
carried out with due diligence" were soon shortened to "due diligence investigation" and finally
"due diligence".

As long as broker-dealers exercised "due diligence" (required carefulness) in their investigation

into the company whose equity they were selling, and as long as they disclosed to the investor
what they found, they would not be found liable for non-disclosure of information that was not
discovered in the process of that investigation.
The broker-dealer community quickly institutionalized, as a standard practice, the conducting of
due diligence investigations of any stock offerings in which they involved themselves. Originally
the term was limited to public offerings of equity investments, but over time it has become
associated with investigations of private mergers and acquisitions (M&A) as well.

3.1.2 Meaning:

“Due diligence” is an analysis and risk assessment of an impending business transaction. It is the
careful and methodological investigation of a business or persons, or the performance of an act
with a certain standard of care to ensure that information is accurate and to uncover information
that may affect the outcome of the transaction.

Due diligence is a comprehensive process in business transactions involving the exchange,

review, and appraisal of confidential legal, financial, and other material information between
parties before finalizing the transaction. Companies conduct background checks on clients,
customers, and suppliers to ensure accurate disclosure of information.
The process involves investigating and evaluating potential risks and opportunities associated
with a business opportunity, covering Pre- Transaction, During the Transaction, and Post-
Transaction activities.

3.1.2 Need for Due Diligence:

Misrepresentations and fraudulent dealings are not always obvious or straight. These are to be
uncovered, especially in a major business transaction, as it would create a major impact on the
business. Proper due diligence services explore and asses the details behind the same and to
become fully informed about the financials, business, internal systems, profitability, key
operational aspects, management team, promoters and other material factors that will help in
making an informed decision about an investment.

Due diligence is designed to protect the interests of the Company by providing objective and
reliable information on the target company before making any written commitments. Due
diligence is an investigative process for providing, the desired comfort level about the potential
investment and to minimize the risks such as hidden uncovered liabilities, poor growth prospects,
price claimed for proposed investment being on higher side etc.

Due diligence is also necessary to ensure that there are no onerous contracts or other agreements
that could affect the acquirer's return on investment. The procedures and analyses ultimately
represent a window into the target Company’s success and potential, including what
opportunities exist to grow the business further to meet your goals and objectives.

Due diligence exercise is needed to confirm that the nature and genuineness of a business,
Identify defects/weakness in the target company and to avoid a bad business transaction, to
gather information that is required for valuation of assets, and to negotiate in a better manner. In
nutshell due
diligence is a SWOT analysis of an investment which is essentially required to make an informed
decision about a potential investment.

Due diligence is necessary to allow the investigating party to find out everything that one needs
to know about the subject of the diligence. The objective is to allow the investigator to consider
the following options, considering the facts found in the course of due diligence.

(i) Withdrawal of deal – if the due diligence uncovers information that disclosed the
investments, loan or participation, a risky or undesirable one and which cannot be adequately
resolved then the investigator may withdraw from the deal.

(ii) Adjusting the valuation of the investment – the investigator may revise his valuation of
the company or reassess the price at which it will provide services. More often, the information
will be adverse and therefore the valuation will go down or the price will go up.

(iii) Solving of problems uncovered – it may be possible for a problem uncovered by the due
diligence to be solved before the deal goes ahead. For example, unpaid stamp duty could be paid,
company filings could be put in order or, if negative information is uncovered on a principal of
the target company, the investor may put pressure on the target is put into a state that the
investigator is happier with before it deals with it.

3.1.3 Objectives of Due Diligence

The objective of due diligence is to verify the strategic identification or attractiveness of the
target company, valuation, risk associated etc.

The objective of due diligence may be to—

1. Collect material of information from the target company.

2. Conduct a SWOT analysis to identify the strength and to uncover threats and weaknesses.
3. For improving the bargaining position depending on SWOT analysis.

4. To take an informed decision about an investment.

5. Identification of areas where representations and warranties are required.

6. To provide a desired comfort level in a transaction.

7. To ensure complete and accurate disclosure.

8. Bridge the gap between the existing and expected.

9. To take smooth/accurate action/decision.

10. To enhance the confidence of stake holders.

The SWOT analysis of the target business carried out as a part of due diligence has to reveal the
strengths and weaknesses of not only the financials but also intangibles. To do this effectively,
the potential buyer needs to be clear about the goals and motives for acquiring the target
company, as well as the value the buyer is attempting to create with the purchase. For example, if
there is a legal risk, such as an outstanding lawsuit, that will not only jeopardize the financial
stability of the company but also the loyalty of existing customers. This will erode the target
company’s market of customers by a new and stronger competitor. The target company’s talent is
the asset desired, and much of this depends on employee relations and accordingly cultural issues
have to be addressed in time. A thorough due diligence helps to reveal any of the negatives, but
the process of due diligence rarely goes smoothly because of one major stumbling block and that
is availability of information. The target company is rarely eager to reveal to the other party that
it is up for sale and wants to keep this information confidential from its competitors, customers
and employees. So getting any information from these sources can be tricky, depending upon
what the potential buyer wants to gain from the transaction. The buyer who aims to get new
market of customers with the transaction wants to make sure that the target company has a good
relationship with existing customers. But, during due diligence, the target company does not
want any contact with its existing customers for fear that customers might leave because of the
impending sale. As another example, a potential buyer sees the employee talent as the company’s
main asset, but the target company is nervous about letting the potential buyer talk to key
employees because it does not want to let on that it is going to be sold. Because of the
confidential nature of transactions, not all the information that is necessary to make a good
decision can be revealed. This is why services of experts are hired in due diligence before
beginning the process so the buyer receives reliable guidance. It is also critical to meet with
trusted advisors–– both inside and outside about what has been discovered and brainstorm the
different scenarios of what can go wrong before going ahead with the deal.

Once a purchase price is agreed upon the prospective buyer usually enters into a conditional
agreement with a due diligence clause with the target business, in which the buyer has a limited
period to conduct due diligence. During this time, the potential buyer requests full access to all
relevant materials in the target business, all customer, vendor, financial and other information in
order to conduct a thorough investigation. Here it is to be ensured that the potential buyer does
not use this information for its own benefit if it decides to back out of the deal, a confidentiality
agreement is usually signed to protect the target businesses’ interests. But a possibility of re-
negotiation of the purchase price or cancellation of the agreement on the part of buyer is seen if
the information found is not acceptable to the potential buyer. Again after due diligence, the goal
is to either reaffirm the purchase price or renegotiate, depending on what was discovered. But the
ultimate goal is to make a rational decision based on the facts. While it may be hard to overcome
the excitement of purchasing a business, here the potential buyer is prepared to cancel the deal as
earlier said if something is discovered that runs counter to why the business looked like a good
deal in the first place.

3.3.4 Scope of Due Diligence

Scope of due diligence is transaction-based and is depending on the needs of the people who is
involved in the potential investments, in addressing key uncovered issues, areas of concern/threat
and in identifying additional opportunities.

Due diligence is generally understood by the legal, financial and business communities/potential
investors to mean the disclosure and assimilation of public and proprietary information related to
the assets and liabilities of the business being acquired. This information includes financial,
human resources, tax, environmental, legal matters, intellectual property matters etc.

Due diligence would include thorough understanding of all the obligations of the target
company: debts, rights and obligations, pending and potential lawsuits, leases, warranties, all
high and impact laden contracts – both inter-corporate and intracorporate.

The investigation or inspection would cover:

1. Compliance with applicable laws

2. Regulatory violations or disciplinary actions
3. Litigation and assessment of feasibility of pursuing litigation
4. Financial statements
5. Assets, real and intellectual property, brand value etc.
6. Unpaid tax liens and/or judgements
7. Past business failures and consequential debt
8. Exaggerated credentials/Fraudulent claims
9. Misrepresentations or character issues
10. Cross-border issues
11. Double taxation, foreign exchange fluctuation, sovereign risk, investment climate,
cultural aspects.
12. Reputation, goodwill and other intangible assets

Assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and
prudent person under the particular circumstance, not measure by any absolute standard but
depends on the relative facts of the special case.
 SECTION 3.3 TECHNICAL DUE DILIGENCE

A strong business plan is crucial in today’s rapidly evolving business landscape.

However, the strength of your business plan relies heavily on the technology that
underpins it. This is where Technical Due Diligence becomes essential, particularly when
potential investors, merger partners, or other stakeholders request it. TDD is not reserved
for tech experts; it’s a vital consideration for anyone exploring a business opportunity in
our digital era.

Technical Due Diligence is like a detailed check-up for the tech companies’ technology
environment before getting investments. It looks at things like how that companies’
product works, the quality of the company code, and any possible problems. It is all about
making sure that the company make smart decisions before getting money. Requesting
and initiating the Technical Due Diligence process at an early stage is highly advisable.
Doing so can lead to significant cost savings, reducing project expenses by up to 20%.

Document every finding carefully. Use specialized software to look at the data, as doing it
by hand could lead to mistakes about 30% of the time. It helps the company spot
strengths and weaknesses in the system, before allocating the budget and investments.

Need for Technical Due Diligence

When it comes to making smart decisions in the tech world, having TDD (technical due
diligence) can be a game-changer. It helps you avoid costly mistakes and ensures the
companies’ investments are solid.

a) Early-Stage Startups and Seed Funding

For startups in their infancy, Technical Due Diligence may not be the first priority.
However, it shouldn’t be overlooked. Conducting a preliminary Technical Due Diligence
before seeking seed funding can establish a strong technical foundation. It sets a
precedent for operational excellence, allowing the startup to attract initial investors with
greater confidence.

b) Mergers and Acquisitions

In addition to already established points, M&A activities necessitate a detailed Technical

Due Diligence from both the buyer and the seller. The buyer performs TDD to precisely
understand what they are acquiring, while the seller uses it to justify their valuation and
expedite the acquisition process. This dual Technical Due Diligence process ensures that
both parties are on the same page, reducing the risk of post- acquisition complications.
 c) Regulatory Compliance Checks

Strict compliance standards govern industries like energy, healthcare, finance, and data
analytics. Periodic Technical Due Diligence checks are essential to ensure that the
technology adheres to the requisite laws and regulations. This not only helps in avoiding
legal repercussions but also boosts the company’s credibility in the market.
d) Preparing for an IPO

When a company is planning for an Initial Public Offering (IPO), a thorough Technical
Due Diligence can add significant value. It offers potential investors an in-depth view of
the company’s technical maturity, thereby contributing to a more accurate and potentially
higher company valuation.

3.3.2 Significance of Technical Due Diligence:

Technical Due Diligence is a crucial process that holds immense value throughout various
stages of a business’s journey. Whether you are seeking investments, aiming to highlight
your technological advantages and competitive edge, or providing evidence of your return
on investment (ROI). Technical Due Diligence plays a vital role. Let us explore why it is
essential at different stages!

3. Securing Investments

Technical due diligence acts as a foundation when you’re on the lookout for investors. It
helps potential backers understand your business’s technical capabilities, risks, and
growth potential. Here’s how it aids in securing investments:

13. Risk Mitigation: By thoroughly assessing your technology, investors can identify
potential risks and challenges, ensuring their investments are well- protected.

14. ROI Projections: A robust technical due diligence report provides investors with
insights into the expected return on their investment. This helps them make informed
decisions about funding your venture.

15. Competitive Advantage: It showcases your technological strengths and how they set
you apart from competitors, making your business more attractive to investors.

2. Highlighting Technological Advantages

The company must focus on their technological advantages to stand out in the
competitive business landscape. Technical Due Diligence helps them achieve this in the
following ways:
16. In-depth Analysis: It involves a comprehensive examination of your technology stack,
allowing you to showcase your strengths and innovations.

17. Validation of Claims: It provides concrete evidence to support your technological

claims, assuring stakeholders of the authenticity of your capabilities.

18. Strategic Positioning: By highlighting your competitive edge, you can position your
business as a leader in your industry, which can bebeneficial in negotiations or
partnerships.

3. Facilitating Mergers
When considering mergers, both parties need a clear understanding of each other’s
technological assets. Here’s how Technical Due Diligencecontributes to a successful
merger:

19. Compatibility Assessment: It evaluates the compatibility of the technologies of both

merging entities, ensuring a smooth integration process.

20. Risk Identification: Any potential technical risks that may arise during the merger are
identified and addressed proactively, reducing post-merger complications.

21. Valuation Guidance: Technical due diligence helps determine the fair value of each
company’s technology, ensuring an equitable merger agreement.

4. Enabling Buyouts

In buyout scenarios, Technical Due Diligence is essential to assess the value and potential
of the target company. Here’s why it’s crucial:

22. Asset Evaluation: It provides a detailed assessment of the target company’s technical
assets, helping the buyer make an informed decision.

23. Due Diligence Report: The findings of Technical Due Diligence form the basis of
negotiations and pricing in the buyout process.

24. Risk Management: It identifies any technical risks associated with the target
company, enabling the buyer to develop risk mitigation strategies.

By conducting TDD diligently, the company not only make their business more attractive
but also ensure that all stakeholders have a solid understanding of their technological
prowess, setting the stage forsuccessful endeavors.
 3.3.3 Process of Technical Due Diligence

Getting an external viewpoint can provide the final seal of approval. Consult people
outside the division of business you areinvestigating for an unbiased view.

4. Pre-Due Diligence Preparation

25. Conducting Internal Audit

Before undergoing external Technical Due Diligence, it’s prudent to conduct an internal
audit. This involves identifying your technology’s key components, features, and
limitations, preparing you for the questions and scrutiny that will come during the formal
TDD process.

26. Assembling Documentation

A crucial step in preparation is gathering all relevant documentation. This includes code
repositories, architectural diagrams, development and deployment pipelines, and any
existing

internal audit reports.

2. Initial Technical Assessment

27. Reviewing Software Architecture

Evaluating the software architecture involves multiple layers of scrutiny. One must look
into how the various components interact, the data flow among them, and how they are
deployed. Any bottlenecks, security vulnerabilities, or issues with scalability are to be
highlighted at this stage.

28. Evaluating the Codebase

The codebase isn’t merely about lines of code. It’s about coding standards, reusability,
and maintainability. Code should be clean, commented, and adhere to the best practices in
the industry. Any tech debt should be quantified because it can significantly impact the
cost and timeline of future development.

3. Stakeholder Engagement

29. Role of Tech Leads and Developers

Tech leads and developers are often the ones most acquainted with the technical details.
They can provide insights into why certain architectural choices were made, how they
have evolved, and what technical debt orchallenges exist.
30. Business Analysts’ Contribution
Business analysts focus on the commercial aspects. They look at how the technical
components align with the business goals, what kind of customer data is handled, and
how it’s protected, and they often translate technical metrics into business KPIs for easier
understanding by non-technical stakeholders.

31. Legal Compliance and Advisors

Legal advisors are indispensable in navigating the regulatory landscape. Their scrutiny
ensures that software licenses are in order, that data handling complies with privacy laws
like GDPR, and that there are no impending legal issues that could jeopardize the project.

32. Role of Project Managers

Often overlooked, project managers play a vital role in aligning the TDD findings with
the project’s timeline and budget. They take into account the recommendations from the
TDD and reassess the project plans accordingly.

4. In-Depth Analysis and Validation

33. Performance and Scalability Testing

Performance and scalability tests should be conducted after the initial assessments and
stakeholder inputs. These tests validate the system’s capacity to meet future demands and
the feasibility of scaling operations.
34. Security Audit and Vulnerability Assessment
A detailed security audit identifies potential threats and vulnerabilities in the system. This
step is crucial for protecting valuable intellectual property and sensitive customer data.

35. Compliance and Regulatory Checks

Beyond the regular legal framework, compliance checks are especially relevant for
industries that have additional regulatory bodies. These could include financial auditing
for fintech companies, HIPAA compliance in healthcare, or accessibility standards for
consumer-facingapps.

5. Final Evaluation and Reporting

A final Technical Due Diligence report is compiled once all the individual components
have been reviewed and validated. This document should be comprehensive, covering
every assessment aspect, the findings, and recommended action steps. This report serves
as the cornerstone for decision-making for investors, acquirers, or internal stakeholders.
3.3.4 Checklist of Technical Due Diligence

5. Preliminary Steps

36. Gather Previous Audits and Evaluations

Before starting with a new Technical Due Diligence, assembling any previous internal or
external audits can provide valuable context. These reports may highlight past issues and
how they’ve been addressed.

37. Initial System Health Check

Use automated monitoring tools to gather baseline statistics. This data can include system
uptime, error rates, and average response times, which offer a snapshot of system
stability.

2) Expert Evaluation

38. Architecture Review

Examine the system’s architectural design, specifically focusing on modularity, fault
tolerance, and system scalability. Evaluate how changes to one component might affect
others.

39. Code Quality Checks

Automated tools can help scan the codebase for adherence to coding standards,
reusability, and common errors. This step helps identify whether the code is high quality
and maintainable.

40. Dependency Analysis

Catalogue the third-party libraries, services, and components that the system relies on.
Evaluate their licenses, longevity, and track record forsecurity and updates.

3) Security Audits
41. Infrastructure Vulnerability Assessment
Assess the security measures in place to protect the infrastructure. This includes firewalls,
encryption, and intrusion detection systems to identifyany potential vulnerabilities.

42. Data Protection and Privacy Review

Especially vital for businesses that handle sensitive data, this step ensures that the
business is in compliance with data protection laws likeGDPR or CCPA.
 4) Performance Metrics

43. Load Testing

This involves simulating real-world loads on the software to test its performance. It can
help identify bottlenecks in the system and indicatehow it performs under stress.

44. Benchmarking
Benchmark the system performance against industry standards or competitor software.
This can provide an objective measure of how the software performs in comparison to
others in the same domain.

5) Quality Assurance and Testing

45. Test Suite Review

Examine the quality and coverage of automated test suites. A comprehensive test suite
can accelerate future development by quicklyidentifying regressions.

46. Manual Testing

Even with robust automated tests, some issues only emerge during manual testing. This
phase can uncover user experience issues, bugs, or inconsistencies that automated tests
may miss.

6) Final Documentation

47. Compilation of Findings

Aggregate all the findings into a single, comprehensive report. This should include both
the strengths and weaknesses identified during thetechnical due diligence.

48. Action Plan

Based on the findings, compile an action plan outlining the steps for remediation.
Priorities these steps based on their impact on security, performance, and business
objectives.

3.3.5 Best Practices technical due diligence

In the realm of technical due diligence (TDD), it’s essential to be armed with the best
practices and tips for a successful evaluation. These valuable insights will help you
navigate the technical due diligence process effectively, ensuring a thorough assessment
of technical aspects.
49. Planning and PreparationStart Earlier
Initiating Technical Due Diligence activities early can provide ample time for assessment
and remediation. Don’t leave TDD to the last minute, asrushed jobs lead to overlooked
details.

50. Assemble Core Team

Choose a team of professionals that includes coders, architects, and business experts. A
well-rounded team ensures a 360-degree view during Technical Due Diligence.

ii. Technical Check-up Tips

51. Use Code Review Tools

Automated code review tools provide an efficient way to identify glaring issues.
However, remember that human input for complex logic isirreplaceable.

52. Focus on Key Components

Zero in on the most critical software modules. These usually have the greatest impact on
business operations and potential valuation.

iii. Security Practices

53. Ongoing Vigilance

Security measures should be continually updated. Regular audits and vulnerability
assessments will help keep your systems secure.

54. Encryption Standards

Ensure that all sensitive data is encrypted, both at rest and in transit. This is essential for
compliance and risk mitigation.

iv. Stakeholder Communication

55. Transparent Reporting

Be transparent in all reporting stages of the Technical Due Diligence process. This helps
build trust and creates a robust roadmap for future actions.

56. Educate Stakeholders

Both technical and non-technical stakeholders must understand the Technical Due
Diligence findings. Conduct briefings to bridge the knowledge gap.
 v. Data Management Best Practices

57. Audit Data Flows

Analyze how data moves through the system. This can reveal inefficiencies and potential
security risks that may otherwise go unnoticed.
Comply with RegulationsMake sure you are up-to-date with data protection regulations
like GDPR. Non-compliance can result in hefty fines and legal complications.

vi. Documentation and Reporting

58. Keep Records

Thorough documentation can be a lifesaver, especially when changes in staff or
management occur. Keep meticulous records for futurereference.

59. Executive Summaries

An executive summary that highlights key findings and recommendations is invaluable. It
helps decision-makers quickly grasp the TDD’s implications.

vii. Post-TDD Follow-up

60. Implement Changes

Once the Technical Due Diligence report is out, priorities and implement the suggested
changes. Time is of the essence, especially if critical issues are identified.

61. Review and Update

Technical Due Diligence is not a one-off activity but should be periodically revisited.
Consistent reviews help to keep your systems updated and secure.

Section 3.2 Factors, Types, and process of Due Diligence

3.2.1 Important basic factors of Due Diligence
Purpose of transaction: A key step in any due diligence exercise is to develop an
understanding of the purpose for the transaction. The goal of due diligence is to provide the
party proposing the transaction with sufficient information to make a reasoned decision as to
whether or not to complete the transaction as proposed. It should provide a basis for
determining or validating the appropriate terms and price for the transaction incorporating
consideration of the risks inherent in the proposed transaction.

SCOPE:

6. Be clear about your expectations in terms of revenues, profits and the probability
of the target company to provide you the same.

(ii) Consider whether you have resources to make the business succeed and whether
you are willing to put in all the hard work, which is required for any new venture.

(iii) Consider whether the business gives you the opportunity to put your
skills and experience to good use.

(iv) Learn as much as you can about the industry you are interested in from media
reports, journals and people in the industry.

Planning the schedule: Once it is decided for a particular business, make sure of the
following things: — Steps to be followed in due diligence process

· Areas to be checked

· Aspects to be checked in each area

· Information and other material to be requested from the seller.

Negotiation for time: Sometimes, it may be the case that, sellers want the process to get
over as soon as possible and try to hurry the proceedings. When the seller gives a short
review period, negotiations can be made for adequate time to have a complete review on
crucial financial and legal aspects.

Risk Minimization: All the information should be double checked– financials, tax
returns, patents, copyrights and customer base to ensure that the company does not face a
lawsuit or criminal investigation. The financials are very important and one needs to be
certain that the target company did not engage in creative accounting. The asset position
and profitability of the company are vital. Since, Due diligence exercise deals with the
overall business, it is important to consider aspects such as:
 · Background of promoters
· Performance of senior management team
· Organizational strategy
· Business plans
· Risk management systemTechnological advancement
· Infrastructure adequacy
· Optimum utilization of available resources.

Information from external sources: The company’s customers and vendors can be quite
informative. It may be found from them whether the target company falls in their most
favored clients list.

Any flaws that the audit uncovers would help to negotiate down the sale price. Due
diligence is “a chance to get a better deal”. But don’t go overboard. Remember that the
whole point of buying a company is to add people to your own organization. Even if the
seller and staff do not stay on after the deal, they may prove useful as advisers in the
future.

Limit the report with only material facts: While preparing the report it is advisable to be
precise and only the information that has a material impact on the target company is
required to be included. Structure of information Once the due diligence process is over,
while preparing the report, information has to be structured in an organized manner in
order to have a better correlation on related matters.

3.2.2 FACTORS TO BE KEPT IN MIND WHILE CONDUCTING DUE

DILIGENCE:

Due diligence is a vital step in any industrial project, especially when it involves cross-
border business. Conducting due diligence on cross- border industrial projects involves a
detailed assessment of various factors to ensure that the project is financially sound,
feasible, and legally compliant. Here are some key factors that you should consider when
conducting due diligence in cross-border industrial projects:

1. Political and Economic Environment: The political and economic environment in

the country where the project is being undertaken plays a critical role in the
success of the project. You need to assess the political stability, economic policies,
exchange rate, and inflation rate to evaluate the viability of the project.

2. Legal and Regulatory Compliance: Laws and regulations vary from country to
country, and compliance requirements may be different as well. It is essential to
conduct a comprehensive review of all applicable laws and regulations and ensure
that the project complies with them.
 3. Market Analysis: You need to assess the market potential and competition in the
industry in the country where the project is being undertaken. This will help you
determine whether the project is feasible and financially viable.

4. Operational Assessment: You need to evaluate the operational and technical

capabilities of the project. This involves a detailed review of the manufacturing
process, production capacity, and supply chain management.
5. Financial Analysis: Conducting a financial analysis is a critical step in due
diligence. You need to assess the financial viability of the project, including the
projected revenue, cash flow, and profit margins.

6. Cultural Differences: Understanding cultural differences is essential when dealing

with cross-border business. You need to assess the cultural differences between
the home country and the host country to ensure that the project is culturally
sensitive and appropriate.

7. Human Resources and Employment Laws: Employment laws and human resource
practices vary from country to country. You need to assess the labor laws and
employment practices in the host country to ensure that the project complies with
them.

8. Intellectual Property Rights: Intellectual property rights are critical for any
industrial project. You need to evaluate the intellectual property rights in the host
country and ensure that the project complies with them.

9. Environmental Impact: Environmental regulations may vary in different countries.

You need to assess the environmental impact of the project and ensure that it
complies with all applicable regulations.

10. Risk Assessment: Conducting a comprehensive risk assessment is critical to

identifying and mitigating risks associated with the project. This involves a
detailed review of all potential risks, including legal, financial, operational, and
reputational risks.

3.2.3 PROCESS OF DUE DILIGENCE

A due diligence process can be divided into three stages

7. Pre diligence,
8. Diligence, and
Post diligence.
9. Pre diligence:

A pre diligence is primarily the activity of management of paper, files and people.

1. Signing the Letter of Intent (LOI) and the Non-Disclosure Agreement Understand the
purpose for the transaction Plan the schedule of Due diligence
Negotiate for adequate time to analyses the facts Background check of promoters and
senior management Infrastructure adequacy Information from external sources
Observation of culture of employees

· Limiting the Report only with material facts Important things to remember
while carrying out due diligence exercise (NDA)/ Engagement letter. (A
sample format is enclosed at Annexure I)
· Receipt of documents from the company and review of the same with the
checklist of documents already supplied to the company.
· Identifying the issues.
· Organizing the papers required for a diligence.
· Creating a data room.

The first and foremost in a deal for the management of the target company, is that the
investor is to sign a Letter of Intent (LOI) or a term sheet which underlines the various
terms on which the proposed deal is to be concluded. Immediately on receipt of the LOI
the investors sign an NDA with the various agencies conducting a diligence, be it finance,
accounting, legal or a secretarial diligence.

The company, would usually receive a checklist from the agency conducting the
diligence. The checklist is invariably exhaustive in nature, and therefore, the company
may either collate and compile the documents in- house, or outsource this to an external
agency. While the data is being
collated care should be taken to ensure that there are no loose ends that may probably arise.

As regards a data room, some of the important things that one should take cognizance of
from the corporate view point are the following:

10. Do not delay deadlines (leads to suspicion).

11. Mark each module of the checklist provided for separately.
12. In case some issues are not applicable spell it out as “Not Applicable”.
13. In case some issues cannot be resolved immediately, admit it.
14. Put a single point contact to oversee the process of diligence.
15. Keep a register, to track people coming in and going out.
16. An overview on the placement of files.
17. Introduction to the point person.

During the diligence, care should be taken to adhere to certain hospitality issues, like:

· Be warm and receptive to the professionals who are conducting diligence.

· Enquire on the DD team.
· Join them for lunch.
· Ensure good supply of refreshments.
· In case of any corrections – admit and rectify.

As regards the process of diligence, as a professional care should be taken to scrutinize

every document that is made available and ask for details and clarifications, though,
generally the time provided to conduct the diligence may not be too long and though
things have to be wrapped up at the earliest. The company may be provided an
opportunity to clear the various issues that may arise out of the diligence.

(ii) Diligence:

After the diligence, is conducted, the professionals submit a report, which is common
parlance is called the DD report. These reports can be of various kinds, a summary report;
a detailed report or the like; and the findings mentioned in the report can be very
significant, in as much as the deal is concerned.

There are certain terms used to define the outcome of these reports:

Deal Breakers: In this report the findings can be very glaring and may expose various
non-compliance that may arise – any criminal proceedings or known liabilities.

Deal Diluters: The findings arising out a diligence may contain violations which may
have an impact in the form of quantifiable penalties and in turn may result in diminishing
the value of company.
Deal Cautioners: It covers those findings in a diligence which may not impact the
financials, but there exist certain non-compliances which though rectifiable, require the
investor to tread a cautious path.

Deal Makers: Which are very hard to come by and may not be a reality in the strict sense,
are those reports wherein the diligence team have not been able to come across any
violations, leading them to submit what is called a ‘clean report’.

Interestingly, only after the reporting formalities are over and various rectifications are
carried out, the “shareholders agreement” (which is the most important document) is
executed. This agreement contains certain standard clauses like the tag along and drag
along rights; representations and warranties; condition precedents, and other clauses that
have an impact on the deal.

(iii) Post Diligence:

Post diligence sometimes result in rectification of non- compliances found during the
course of due diligence. There can be interesting assignments arising out of the diligence
made by the team of professionals. It can range from making applications/ filing of
petition for compounding of various offences or negotiating the shareholders’ agreement,
since the investors will be on a strong wicket and may negotiate the price very hard.

Example of due diligence process in a M&A strategy

Stages For Buyer For seller

Preparation Stage M&A Strategy formulation Structure a Business plan
Prepare a of List of potential
targets
Prepare a list of potential
buyers
Appoint external advisor
for evaluation of targets
Appoint external advisor
Shortlist buyers
Short list targets

Create Due diligence team

Pre diligence Approach targets Approach buyers
Negotiate initial terms Negotiate initial terms
Execute Non- Execute Non-
Disclosure Agreement Disclosure agreement
Compile a list of
Create a Data room
data required

Due diligence Inspection of Data room Assistance in data room

Analysis of private Setting deadlines for offer

documents Evaluation of risk
and return
Structuring the terms and
conditions

Negotiations Make final offer Compile final offers

select best offer negotiations
Negotiate and agree on
terms

Post diligence Post merger integration Termination of data room

and cultural adjustments and ownership exchange

3.2.4 Techniques of Due Diligence:

In general, due diligence can be conducted by various parties involved in a

transaction or decision-making process. Some of these parties include:

62. Buyers or investors — These could be an entity or individual seeking to invest by

assessing the risks, financial health, and opportunities linked to the target company.
63. Sellers — Companies or individuals selling an asset or business can also perform
due diligence to clearly understand potential liabilities prior to entering into a deal.
Accountants — Certified public accountants (CPAs) and accounting firms are
frequentlyhired to examine financial records, check the accuracy of financial statements,
and identify accounting irregularities.
64. Financial advisors — Financial analysts or consultants typically assist buyers and
sellers with due diligence by providing their expertise in financial analysis, risk
assessment, and market research.

65. Legal advisors — Legal teams and lawyers particularly review contracts, identify
legal risks, and ensure regulatory compliance concerning the transaction.

Such parties typically work together to analyze information, assess risks, and make
informed decisions based on their findings during the due diligence process.

When to conduct due diligence?

Due diligence is typically conducted before any business transaction. The bigger and
more complex the deal, the more extensive due diligence is needed. More so, it can be
performed at various stages of the decision- making process — from pre-transaction to
actual risk management. As a general rule, due diligence should be completed before the
deal closes.

3.2.5 Types of Due Diligence:

18. Hard Due Diligence

19. soft Due Diligence

20. Hard Due Diligence

Considered the traditional approach, hard due diligence involves the collection and
verification of concrete data and numbers. This category covers the majority of due
diligence, focusing on the enterprise’s financial aspects, taxes, and operations.

Hard due diligence primarily looks into three things: facts about a company’s status,
figures based on its financial documentation, and legal for compliance and litigation
concerns. These are some of the types of hard due diligence:

Financial Due Diligence

This type is conducted to ensure the accuracy of a company’s financial records stated in
its confidential information memorandum. Financial accounts, business forecasts, and
inventory schedules are often investigated. Performing financial due diligence also
involves analysis of profit margins, fixed and variable cost analysis, customer account
verification, and analysis of internal control procedures. Moreover, the company’s debt
situation is checked, evaluating its ability to pay its outstanding debt and if needed, secure
more financing.
Legal Due Diligence

Checking into legal matters can make or break a business deal. In most cases, legal due
diligence impacts how or if the transaction will move forward. The deal’s structure can be
influenced by issues such as pending or previous litigation, non-compete clauses, or
breached contracts. This procedure is also known to be a mandatory consideration for
companies before entering an M&A. Legal due diligence requires an evaluation of all
material contracts, including:

66. Loan and bank financing agreements

67. Licensing or franchise agreements
68. Partnership agreements
69. Guarantees
70. Copy of Memorandum and Articles of Association
71. Board meeting meetings over the past three years

Tax Due Diligence

Also known as fiscal due diligence, tax due diligence refers to the careful examination of
tax liabilities. This type particularly looks into the company’s current tax structure,
pending tax-related cases, and level of compliance with tax laws.

Conducting such analysis ensures that all the organization’s taxes are being reported and
paid. Some documents that are subject to validation include tax audits, tax returns for the
past three to five years, and agreements with tax agencies.
Operational Due Diligence

This type of due diligence covers all the operation risks and processes that can either
negatively or positively impact the deal. It concentrates on the company’s operating
model to identify gaps and opportunities that require development or investment. This
covers areas such as company assets, products and services, technology, supply chain,
sales, marketing, and any existing facilities,

Intellectual Property Due Diligence

Intellectual property (IP) refers to tangible assets that contribute to an organization’s

market position and competitive advantage. IP due diligence aims to evaluate assets such
as:

72. Patents for technologies or inventions developed by the company

73. Copyrights for business software and creative assets
74. Existing trademarks that could lead to legal disputes
75. Chain-of-ownership documentation

Moreover, IP due diligence also focuses on safeguarding the trade secrets of a company
and ensuring confidentiality is maintained. By performing due diligence, companies can
assess the value and risks associated with IP assets. Hence, avoiding legal complications
as well.

ii) Soft Due Diligence

Soft due diligence is known to be harder to conduct since it concentrates on the

company’s culture fit and other facets related to human capital. Or, to put it simply, it
investigates the elements related to how people work or fit into the organization’s culture.

Human Resources Due Diligence

Human resources due diligence focuses on the most valuable asset within a company: the
employees. This process is considered to be as extensive as financial due diligence, and
involves the analysis of the following:

76. Current positions and vacancies

77. Current salaries of employees during the last three years
78. Benefit and retirement packages
79. HR policies for annual and sick leaves
80. Employee issues, such as alleged discrimination, harassment, or wrongful termination

Employment contracts, from nondisclosure to non-competition agreements HR due

diligence can help identify any people-based risks before making a deal, and get a
complete picture of the
organization’s culture. In short, this process covers the workforce’s entire spectrum and
all documentation related to it.

Administrative Due Diligence

This form of due diligence entails the verification of any administrative- related elements,
including business facilities, occupancy rates, and workstations. Such aspects and their
costs are closely connected to a company’s financials. Administrative due diligence aims
to verify the properties a company owns and determine whether operational expenditures
are declared in the financials.

ESG Due Diligence

Environmental, social, and governance (ESG) due diligence focuses on the target
company’s adherence to ethical, sustainable, and well- governed policies. It aims to
uncover material ESG risks, liabilities, and opportunities related to a transactional target
or a portfolio company.

ESG due diligence places significance on non-financial factors that affect an enterprise’s
reputation, financial performance, and regulatory standing. It also helps uncover a
company’s ESG policies and risk factors, enabling ethical investment decisions, mergers,
and acquisitions.
Commercial Due Diligence

In this type, a company’s ecosystem is examined to determine its position in the market.
Commercial due diligence looks into market conditions, trends, and competition. For
instance, in a merger and acquisition, this process can help the buyer understand the
company based on its market and how is it likely to change in the coming years.

3.2.6 Procedure for due diligence

21. Establish a due diligence team

Regardless if it’s a small or huge transaction, assembling a qualified due diligence team
can be beneficial. Building the right team should be focused on experience and
competencies. It is ideal to have experts in relevant fields, including finance and
accounting, operations, law, and risk management. Some roles you can consider are:

· Financial analysts — To analyze financial statements and assess financial

performance.

· Legal advisors — To provide expertise in contract law, litigation matters,

intellectual property rights, and other legal aspects of the transaction.
· Operational experts — To evaluate operational efficiency, production
processes, and supply chain management of
the target entity.
Compliance specialists — To assess the target entity’s compliance with applicable laws
and regulations, as well as contractual obligations.While there is no limit to the number of
people to have on your team, it is crucial to have a leader or project manager to oversee
the due diligence process. Your team does not have to be entirely in-house. Seeking
external sources like outsourcing industry or niche-specific consultants is ideal to further
ensure independent and objective investigation.

2) Gather all relevant documentation

Before you can proceed with the assessments, having the necessary documentation is
critical. This will help your team prepare the diligence reports and verify whether or not
the transaction is doable. Plus, this can guide you in assessing the target company’s
overall viability. Here’s a checklist of some documents you’ll need:

Financial Documents

· Audited financial statements for the past 3-5 years

· Management accounts and financial projections
· Tax returns and related filings
· Bank statements and loan agreements
· Any financial agreements, such as leases or financing arrangements

Legal Documents

· Articles of Incorporation and organizational documents

· Shareholder agreements and ownership structure
· Intellectual property documents (patents, trademarks, copyrights)
· Litigation history and pending legal matters
· Environmental assessments and compliance reports

Operation Documents

· Business plans and strategic documents

· Operations manuals and standard operating procedures (SOPs)
· Quality control and assurance documents
· Supply chain information, including supplier contracts and relationships
· IT infrastructure and cybersecurity policies

Regulatory and Compliance Documents

· Regulatory filings and compliance reports
· Health and safety records
· Environmental assessments and permits
· Data protection and privacy policies
· Compliance with industry standards and certifications
·

3) Verify accuracy and completeness

Once you have the documents you need, it’s time to start verifying the data’s accuracy
and completeness. Besides cross-referencing or reviewing supporting documents, you can
perform verification through independent sources or third-party verification methods. The
easiest on the list is hiring external auditors or appraisers to validate financial, legal, and
technical information. You can also obtain confirmation from counterparties or conduct
background checks.

Moreover, conducting site visits and inspections is also advisable. This helps you verify
the target company’s operational status, or confirm the value of assets like inventory,
equipment, or real estate properties.

4) Conduct post-due diligence actions

Executing post-due diligence actions is crucial for monitoring the initial phase of the
transaction. This can provide an evaluation of the target entity and if the deal is running
as it should. If significant issues are identified, you can develop a remediation plan to
address these concerns (e.g. renegotiating the terms and conditions, or recreating
transition plants).

Additionally, monitoring the performance and integration of the acquired assets or

operations should be considered. You may also conduct a post- mortem analysis to
evaluate the effectiveness of the due diligence process and get insights for future
transactions. This feedback loop can help improve your due diligence practices too.

3.2.7 Technology enhances the due diligence process:

Technology can significantly improve the due diligence process in several ways, including:

81. Efficient collection and aggregation of large volumes of data, from databases,
online repositories, and internal systems.
82. Provide secure and centralized repositories for organizing, storing, and sharing
due diligence documents. Most tools even offer features like version control, access
controls, audit trails, and document indexing.Analyze and visualize complex datasets to
identify patterns and gain insights. This may involve the use of dashboards, charts, and
graphs.
83. Facilitate collaboration and communication among due diligence team members
and stakeholders. Many platforms like Convene can enable seamless information sharing,
task assignment, progress tracking, and decision-making, regardless of users’
geographical location.

SECTION 3.3 TECHNICAL DUE DILIGENCE

A strong business plan is crucial in today’s rapidly evolving business landscape.

However, the strength of your business plan relies heavily on the technology that
underpins it. This is where Technical Due Diligence becomes essential, particularly when
potential investors, merger partners, or other stakeholders request it. TDD is not reserved
for tech experts; it’s a vital consideration for anyone exploring a business opportunity in
our digital era.

Technical Due Diligence is like a detailed check-up for the tech companies’ technology
environment before getting investments. It looks at things like how that companies’
product works, the quality of the company code, and any possible problems. It is all about
making sure that the company make smart decisions before getting money. Requesting
and initiating the Technical Due Diligence process at an early stage is highly advisable.
Doing so can lead to significant cost savings, reducing project expenses by up to 20%.

Document every finding carefully. Use specialized software to look at the data, as doing it
by hand could lead to mistakes about 30% of the time. It helps the company spot
strengths and weaknesses in the system, before allocating the budget and investments.

3.3.1 Need for Technical Due Diligence

When it comes to making smart decisions in the tech world, having TDD (technical due
diligence) can be a game-changer. It helps you avoid costly mistakes and ensures the
companies investments are solid.

a) Early-Stage Startups and Seed Funding

For startups in their infancy, Technical Due Diligence may not be the first priority.
However, it shouldn’t be overlooked. Conducting a preliminary Technical Due Diligence
before seeking seed funding can establish a strong technical foundation. It sets a
precedent for operational excellence, allowing the startup to attract initial investors with
greater confidence.

b) Mergers and Acquisitions

In addition to already established points, M&A activities necessitate a detailed Technical

Due Diligence from both the buyer and the seller. The buyer performs TDD to precisely
understand what they are acquiring, while the seller uses it to justify their valuation and
expedite the acquisition process. This dual Technical Due Diligence process ensures that
both parties are on
the same page, reducing the risk of post- acquisition complications.

c) Regulatory Compliance Checks

Strict compliance standards govern industries like energy, healthcare, finance, and data
analytics. Periodic Technical Due Diligence checks are essential to ensure that the
technology adheres to the requisite laws and regulations. This not only helps in avoiding
legal repercussions but also boosts the company’s credibility in the market.

d) Preparing for an IPO

When a company is planning for an Initial Public Offering (IPO), a thorough Technical
Due Diligence can add significant value. It offers potential investors an in-depth view of
the company’s technical maturity, thereby contributing to a more accurate and potentially
higher company valuation.
3.3.2 Significance of Technical Due Diligence:

Technical Due Diligence is a crucial process that holds immense value throughout various
stages of a business’s journey. Whether you are seeking investments, aiming to highlight
your technological advantages and competitive edge, or providing evidence of your return
on investment (ROI). Technical Due Diligence plays a vital role. Let’s explore why it is
essential at different stages!

22. Securing Investments

Technical due diligence acts as a foundation when you’re on the lookout for investors. It
helps potential backers understand your business’s technical capabilities, risks, and
growth potential. Here’s how it aids in securing investments:

· Risk Mitigation: By thoroughly assessing your technology, investors can identify

potential risks and challenges, ensuring their investments are well- protected.
· ROI Projections: A robust technical due diligence report provides investors with
insights into the expected return on their investment. This helps them make informed
decisions about funding your venture.

· Competitive Advantage: It showcases your technological strengths and how they

set you apart from competitors, making your business more attractive to investors.

2. Highlighting Technological Advantages

The company must focus on their technological advantages to stand out in the
competitive business landscape. Technical Due Diligence helps them achieve this in the
following ways:
· In-depth Analysis: It involves a comprehensive examination of your technology
stack, allowing you to showcase your strengths and innovations.
· Validation of Claims: It provides concrete evidence to support your technological
claims, assuring stakeholders of the authenticity of your capabilities.
· Strategic Positioning: By highlighting your competitive edge, you can position
your business as a leader in your industry, which can be beneficial in negotiations or
partnerships.

3. Facilitating Mergers

When considering mergers, both parties need a clear understanding of each other’s
technological assets. Here’s how Technical Due Diligence contributes to a successful
merger:
· Compatibility Assessment: It evaluates the compatibility of the technologies of
both merging entities, ensuring a smooth integration process.
· Risk Identification: Any potential technical risks that may arise during the merger
are identified and addressed proactively, reducing post-merger complications.
· Valuation Guidance: Technical due diligence helps determine the fair value of
each company’s technology, ensuring an equitable merger agreement.

2. Enabling Buyouts

In buyout scenarios, Technical Due Diligence is essential to assess the value and potential
of the target company. Here is why it’s crucial:

· Asset Evaluation: It provides a detailed assessment of the target company’s

technical assets, helping the buyer make an informed decision.
· Due Diligence Report: The findings of Technical Due Diligence form the basis of
negotiations and pricing in the buyout process.
· Risk Management: It identifies any technical risks associated with the target
company, enabling the buyer to develop risk mitigation strategies.

By conducting TDD diligently, the company not only make their business more attractive
but also ensure that all stakeholders have a solid understanding of their technological
prowess, setting the stage for successful endeavors.

3.3.3 Process of Technical Due Diligence

Getting an external viewpoint can provide the final seal of approval. Consult people
outside the division of business you are investigating for an unbiased view.

23. Pre-Due Diligence Preparation

Conducting Internal AuditBefore undergoing external Technical Due Diligence, it’s

prudent to conduct an internal audit. This involves identifying your technology’s key
components, features, and limitations, preparing you for the questions and scrutiny that
will come during the formal TDD process.

· Assembling Documentation

A crucial step in preparation is gathering all relevant documentation. This includes code
repositories, architectural diagrams, development and deployment pipelines, and any
existing internal audit reports.

2. Initial Technical Assessment

· Reviewing Software Architecture

Evaluating the software architecture involves multiple layers of scrutiny. One must look
into how the various components interact, the data flow among them, and how they are
deployed. Any bottlenecks, security vulnerabilities, or issues with scalability are to be
highlighted at this stage.

· Evaluating the Codebase

The codebase isn’t merely about lines of code. It’s about coding standards, reusability,
and maintainability. Code should be clean, commented, and adhere to the best practices in
the industry. Any tech debt should be quantified because it can significantly impact the
cost and timeline of future development.

3. Stakeholder Engagement

· Role of Tech Leads and Developers

Tech leads and developers are often the ones most acquainted with the technical details.
They can provide insights into why certain architectural choices were made, how they
have evolved, and what technical debt or challenges exist.

· Business Analysts’ Contribution

Business analysts focus on the commercial aspects. They look at how the technical
components align with the business goals, what kind of customer data is handled, and
how it’s protected, and they often translate technical metrics into business KPIs for easier
understanding by non-technical stakeholders.

· Legal Compliance and Advisors

Legal advisors are indispensable in navigating the regulatory landscape. Their scrutiny
ensures
that software licenses are in order, that data handling complies with privacy laws like
GDPR, and that there are no impending legal issues that could jeopardise the project.

· Role of Project Managers

Often overlooked, project managers play a vital role in aligning the TDD findings with
the project’s timeline and budget. They take into account the recommendations from the
TDD and reassess the project plans accordingly.

4. In-Depth Analysis and Validation

· Performance and Scalability Testing

Performance and scalability tests should be conducted after the initial assessments and
stakeholder inputs. These tests validate the system’s capacity to meet future demands and
the feasibility of scaling operations.

· Security Audit and Vulnerability Assessment

A detailed security audit identifies potential threats and vulnerabilities in the system. This
step is crucial for protecting valuable intellectual property and sensitive customer data.

· Compliance and Regulatory Checks

Beyond the regular legal framework, compliance checks are especially relevant for
industries that have additional regulatory bodies. These could include financial auditing
for fintech companies, HIPAA compliance in healthcare, or accessibility standards for
consumer-facing apps.

5. Final Evaluation and Reporting

A final Technical Due Diligence report is compiled once all the individual components
have been reviewed and validated. This document should be comprehensive, covering
every assessment aspect, the findings, and recommended action steps. This report serves
as the cornerstone for decision-making for investors, acquirers, or internal stakeholders.

3.3.4 Checklist of Technical Due Diligence

24. Preliminary Steps

Gather Previous Audits and EvaluationsBefore starting with a new Technical Due
Diligence, assembling any previous internal or external audits can provide valuable
context. These reports may highlight past issues and how they’ve been addressed.

84. Initial System Health Check

Use automated monitoring tools to gather baseline statistics. This data can include system
uptime, error rates, and average response times, which offer a snapshot of system
stability.
 2. Expert Evaluation

85. Architecture Review

Examine the system’s architectural design, specifically focusing on modularity, fault

tolerance, and system scalability. Evaluate how changes to one component might affect
others.

86. Code Quality Checks

Automated tools can help scan the codebase for adherence to coding standards,
reusability, and common errors. This step helps identify whether the code is high quality
and maintainable.

87. Dependency Analysis

Catalogue the third-party libraries, services, and components that the system relies on.
Evaluate their licenses, longevity, and track record for security and updates.

3. Security Audits

88. Infrastructure Vulnerability Assessment

Assess the security measures in place to protect the infrastructure. This includes firewalls,
encryption, and intrusion detection systems to identify any potential vulnerabilities.

89. Data Protection and Privacy Review

Especially vital for businesses that handle sensitive data, this step ensures that the
business is in compliance with data protection laws like GDPR or CCPA.

4. Performance Metrics

90. Load Testing

This involves simulating real-world loads on the software to test its performance. It can help
identify bottlenecks in the system and indicate how it performs under stress.

91. Benchmarking
 Benchmark the system performance against industry standards or competitor software.
This can provide an objective measure of how the software performs in comparison to
others in the same domain.

5. Quality Assurance and Testing

92. Test Suite Review

Examine the quality and coverage of automated test suites. A comprehensive test suite
can accelerate future development by quickly identifying regressions.

93. Manual Testing

Even with robust automated tests, some issues only emerge during manual testing. This
phase can uncover user experience issues, bugs, or inconsistencies that automated tests
may miss.

6. Final Documentation

94. Compilation of Findings

Aggregate all the findings into a single, comprehensive report. This should include both
the strengths and weaknesses identified during the technical due diligence.

95. Action Plan

Based on the findings, compile an action plan outlining the steps for remediation.
Priorities these steps based on their impact on security, performance, and business
objectives.

3.3.5 Best Practices technical due diligence

In the realm of technical due diligence (TDD), it’s essential to be armed with the best
practices and tips for a successful evaluation. These valuable insights will help you
navigate the technical due diligence process effectively, ensuring a thorough assessment
of technical aspects.

25. Planning and Preparation

96. Start Earlier

Initiating Technical Due Diligence activities early can provide ample time for assessment and
remediation. Don’t leave TDD to the last minute, as rushed jobs lead to overlooked details.

97. Assemble Core Team

Choose a team of professionals that includes coders, architects, and business experts. A
well-rounded team ensures a 360-degree view during Technical Due Diligence.

2. Technical Check-up Tips

98. Use Code Review Tools

Automated code review tools provide an efficient way to identify glaring issues.
However, remember that human input for complex logic is irreplaceable.

99. Focus on Key Components

Zero in on the most critical software modules. These usually have the greatest impact on
business operations and potential valuation.

3. Security Practices

100. Ongoing Vigilance

Security measures should be continually updated. Regular audits and vulnerability

assessments will help keep your systems secure.

101. Encryption Standards

Ensure that all sensitive data is encrypted, both at rest and in transit. This is essential for
compliance and risk mitigation.

4. Stakeholder Communication

102. Transparent Reporting

Be transparent in all reporting stages of the Technical Due Diligence process. This helps
build trust and creates a robust roadmap for future actions.

103. Educate Stakeholders

Both technical and non-technical stakeholders must understand the Technical Due
Diligence findings. Conduct briefings to bridge the knowledge gap.
5. Data Management Best Practices

104. Audit Data Flows

Analyse how data moves through the system. This can reveal inefficiencies and potential
security risks that may otherwise go unnoticed.
105. Comply with Regulations

Make sure you are up-to-date with data protection regulations like GDPR. Non-
compliance can result in hefty fines and legal complications.

6. Documentation and Reporting

106. Keep Records

Thorough documentation can be a lifesaver, especially when changes in staff or

management occur. Keep meticulous records for future reference.
107. Executive Summaries

An executive summary that highlights key findings and recommendations is invaluable. It

helps decision-makers quickly grasp the TDD’s implications.

7. Post-TDD Follow-up

108. Implement Changes

Once the Technical Due Diligence report is out, priorities and implement the suggested
changes. Time is of the essence, especially if critical issues are identified.

109. Review and Update

Technical Due Diligence is not a one-off activity but should be periodically revisited.
Consistent reviews help to keep your systems updated and secure.