Posted: 13 Feb. 2023 8 min. read

Why a multidisciplinary approach is needed for diligence in software industry-based M&A

A different lens for a different kind of value chain

By: Chuck HartmannTarun K. Kakar

The software industry is unique in many ways, such as how quickly it needs to innovate and how quickly disintermediation can strike. Effective software enterprises stand apart for their ability to create and sustain value, their keen responsiveness to client expectations, and their agility in a continually shifting competitive landscape. It stands to reason that acquiring software-based enterprises is also a unique pursuit.

Identifying, assessing, and acquiring companies like these imposes imperatives you may not face elsewhere. Is the diligence playbook you’re using tuned to the right frequency? If not, you may capture the prize but find later you missed the key indicators of risk and value creation inherent in software-based targets.

Traditional approaches to the evaluation of mergers and acquisitions (M&A) targets focus on assessing risks along the typical diligence silos: product technical, IT back office, cyber, commercial, and operational—including sales and marketing, finance operations, and human resources. Leading acquirers typically go to market with boutique best-of-breed advisers who live within each of those diligence silos. Thus, prepared acquirers hope they’ll be able to knit together informed hypotheses on the potential risks and growth opportunities of each transaction.

However, in recent market research, we found that acquirers who relied on siloed advisers were almost twice as dissatisfied with their own ability to synthesize diligence findings in software-based transactions as they were when it came to other industry-based targets. Looking further into the research, we found private equity and strategic enterprise transaction teams felt this discontent about equally.

So, what is it about software-related M&A that makes qualifying value and risk such a challenge despite the input of best-of-breed siloed advisers? Our research shows the heart of the issue lies at the complex interrelationships among diligence disciplines innate to software-based transactions. A compounding factor is the rapidity of software market cycles, which demand near-continuous release cycles packed with innovation, features, and functionality.

What are these connections among diligence disciplines, and why are they part of the answer? Our respondents cited examples and told us how these connections might influence the assessment of risk and value amid the dynamics of the software marketplace.


They told us: Market insights gained through commercial diligence, such as customers’ key purchasing criteria, competitive technologies, market trends, and profit pools, are vital to the technical assessment of the product. Their challenges came in the form of the following questions:

  • Does the target’s product portfolio fulfill current feature and functionality requirements of the market?
  • Does the target’s product road map address emerging technologies and future anticipated customer requirements?
  • Is the architecture sufficiently scalable to the buyer’s intended target markets?
  • Is the target at risk of technological disintermediation?
  • What adjustments may be required in the level of development expense investment to remediate these shortcomings?

They told us: Insights gained through operational diligence, regarding the functional sufficiency of the operating model are vital to the transaction’s proposed financial valuation. Again, their challenges came in the form of the following questions:

  • How informed is the operational diligence estimate on the maturity of the software development life cycle management system?
  • Will incremental investments be needed to render quality products that meet market needs in a repeatable and reliable fashion?
  • Are the software test and code review procedures, quality assurance automation, development tooling, cloud operations, and release management systems providing market leadership, or are they an opportunity for further investment?
  • Is the current development and product management team capable of delivering the product road map, or are there deficiencies in leadership tenure or team skill composition, or inappropriate reliance on third parties for differentiating technology?

They told us: Cyber diligence focused on application security provides insights on the vulnerabilities lying within the software development life cycle, the source code architecture, and utilization of open-source technologies. Again, their challenges came in the form of the following questions:

  • What further investments, at what scale, do you need to make in the operating model or source code itself to rectify these vulnerabilities?
  • How does the functional immaturity of the cyber discipline affect your ability to innovate?

Now, ask yourself: How many times have you passed on an acquisition opportunity where others saw value? How often have you failed to see risk where others have walked? Does your current playbook provide sufficient depth of insight? If you were better able to quickly assimilate potential sources of differentiating value and risk, how much of an edge could that provide in your deal-making?

At Deloitte, we found the lens of software diligence needs to have a wider angle, focused on the interrelationships among diligence silos and the ways those interrelationships affect both the risk and value creation potential of each transaction. We provide our clients a holistic assessment of software-based targets through an integrated diligence platform, custom tailored for software-based targets and led by software industry veterans. We focus on the value creation potential of each transaction and its inherent operational risks.

Thanks to our integrated platform, we can more clearly:

  • Check the alignment of the deal macros with your investment thesis
  • Focus on the foundational maturity of the target company
  • Bring more value creation concepts to the diligence effort
  • Apply a metrics-driven perspective, specific to the software industry

It takes more than a technology assessment to vet a potential acquisition target in the software industry. We believe it takes an integrated diligence approach that assimilates insights quickly from across the entire software enterprise. Our data-driven approach provides the tiles of a mosaic to illustrate the potential and risk the target carries into the future.

You can’t touch software or count it in a warehouse, but you can apply comprehensive meaningful metrics that yield a more accurate vision of where the enterprise is headed. If acquisitions in this space are part of your investment or growth plans, we’d love to talk.

About Deloitte

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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