THE SHIFT IN DUE DILIGENCE
Software has become one of the most valuable assets on the deal table.
Any Private Equity, Venture Capital, or organisation involved in investments, mergers, or acquisitions has an established approach to business due diligence. But while these processes used to revolve mostly around Financial Due Diligence, as companies become more reliant on software, its prominence in due diligence has naturally become a priority.
One of the biggest risk areas in tech M&A is software plagued with vulnerabilities or open-source license compliance issues. Software due diligence lets acquiring or investing companies assess the quality of a target’s software assets, and address — or plan for — any risks before finalizing the deal.
DEFINING THE PROCESS
What is software due diligence?
Software due diligence is a comprehensive evaluation of a company’s software assets during an investment, merger, or acquisition. It assesses the quality, security, compliance, and scalability of the software to identify potential risks and opportunities, helping investors understand the true value and liabilities involved.
Typically carried out by the company considering the M&A or investment, internal due diligence is also often completed before an IPO or M&A. The level of detail varies case by case, usually dictated by the scale of investment or the software’s significance to the deal.
WHY THIS MATTERS TO PE & VC
Software is now one of the most valuable assets a company has.
For private equity and venture capital firms, the software and technology element of due diligence is paramount. It covers:
01
Risk mitigation
Identifying and mitigating risks in quality, security, and legal compliance prevents costly surprises post-investment.
02
Value assessment
Understanding software asset value supports better deal terms and a fair price.
03
Strategic alignment
Ensuring the software supports the strategic goals, growth, and scalability of the deal.
04
Regulatory compliance
Confirming the software meets relevant laws and regulations, avoiding legal and financial repercussions.
KEY ASPECTS
What a complete due diligence report needs to assess.
01
Code Quality
A full analysis of the codebase — languages, maintainability, readability, and technical debt — indicates how much future investment will be needed to bring the software up to standard. Well-organized, high-quality code is easier to maintain, debug, and extend; sub-standard code is slow and expensive to work with.
02
Security
Known vulnerabilities — well-documented weaknesses identified and tracked by the security community — need to be surfaced so the investing company understands potential risk and the further investment required to remove it.
03
Licensing and Intellectual Property
Verifying legal ownership and correct licensing across the product — including third-party dependencies, open-source components, and their versions — since improper usage can create legal liability. Over-dependence on external libraries or services also creates risk if they become unsupported or introduce security issues.
04
Developer History
Visibility into who has worked on the code over time is highly informative: a stable team suggests institutional knowledge is intact, while multiple teams passing development back and forth over the years suggests diluted consistency, best practices, and knowledge — raising future maintenance risk.
05
Code Value
Valuing software involves both objective and subjective factors — functionality, quality, market demand, and future potential. Investors want evidence the software matches the value the company claims, built from a breakdown of what’s custom vs. open-source, how many languages are present, complexity, and outdated components.
THE PROCESS
How to perform software due diligence.
Performing software due diligence involves a systematic, seven-step approach:
01
Initial assessment
Gather basic information — architecture, technology stack, and documentation.
02
Code review
Detailed review of the codebase for quality, security, and maintainability.
03
Security audit
Comprehensive audit to identify vulnerabilities and mitigation steps.
04
License review
Verify the legality of all software licenses and check for IP issues.
05
Performance testing
Evaluate performance under various conditions for scalability and reliability.
06
Compliance check
Confirm the software meets relevant industry standards and regulations.
07
Reporting
Compile a detailed report of findings, risks, and recommendations.
But how do you collate this data — especially without in-house technical specialists?
01
An independent consultancy
A robust mix of technical consultants using a range of analytical tools — thorough, but generally expensive and often covers more than required.
02
A self-service auditing tool
A comprehensive software auditing tool like The Code Registry acts as a more affordable first step, often covering diligence requirements without an expensive consultancy at all.
WHERE THE CODE REGISTRY FIT
Informed, confident investment decisions — without the guesswork.
By leveraging The Code Registry, private equity and venture capital firms can mitigate risk and maximize the value of their investments with clear, actionable data at every step of due diligence.
THE PLATEFORM
Using The Code Registry to perform software due diligence.
01
Automated code analysis
Advanced AI scans over 4,000 rules and data points for a thorough evaluation.
02
Security assessment
Identifies and addresses vulnerabilities to protect your investment.
03
Compliance verification
Confirms the software meets relevant laws and industry standards.
04
Full developer history
Analyzes the complete history of commits, contributors, and changes over time.
05
Detailed reporting
Clear, actionable reports to inform investment decisions.
FROM COMPLEXITY TO CLARITY
Move from uncertainty to complete code confidence.
Get the independent intelligence you need to understand, verify and protect your software.
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