What should be considered in a technical due diligence?

Mario Busshoff

18. December 2019

What is a technical due diligence?

Technical Due Diligence (often referred to as “Technical Due Diligence” or “TDD” for short) is part of due diligence. Due diligence means the detailed analysis and assessment of all areas and aspects of a company in the context of a company participation or a company purchase.

The English term “due diligence” is intended to express the importance of this part. An investor or corporate buyer would like to avoid unnecessary risks when participating in a company or buying a company. In order to be able to quantify the value of a company as precisely as possible, it must be carefully examined and evaluated with all its strengths and weaknesses as well as opportunities and risks in all areas.

Especially in very technology-oriented or -driven industries, the TDD is often the most important part of a DD. Certain technologies, patents, or research results can be of existential importance to technology companies or even represent an existential threat. Therefore, a TDD should never be neglected and considered a “minor sister” to the other DD Divisions.

What is the content of a TDD?

Technical due diligence focuses on the technical and technological aspects of a company. As part of a TDD, the company’s machinery, equipment and infrastructures are analyzed as well as technical and technological issues relating to the company’s products.

The assessment of the machinery and equipment park plays an essential role, especially for producing companies. A buyer or investor must be in a position to assess the state of the tangible assets of the investment object before making a purchase / investment decision. A TDD provides valuable information about what investment needs are in the business and how high any maintenance expenses will be in the future.

For high-tech companies, a TDD often focuses on issues related to the technological aspects of products or services. Potential investors must have a clear idea of how sustainable the products and services of their investment property are. As part of a TDD, the analysis of a company’s intangible assets, such as licenses and patents, also plays a key role.

Essential areas of analysis of a TDD

The following list is a non-exhaustive overview of the questions that are analyzed and evaluated in the course of a TDD:

  • Technical competitiveness of a company based on national and international benchmarks
  • Capacity utilization and efficiency of production facilities
  • Investment needs in technical terms
  • Operating and maintenance costs of technical equipment
  • Operational organization as well as schedules and the technical management of a company
  • Efficiency of value chains
  • Technical standards and rules

The sensitivity of a TDD

For many companies, the TDD is the most sensitive part of the entire DD exam. For industrial and technology companies, the release of technical data and details is a highly sensitive undertaking, especially if the potential buyer is a stranger or even a competitor.

For fear that sensitive data will fall into the wrong hands, a TDD is often performed at a later stage of a corporate sales process, when the number of potential buyers is already limited. In very critical cases, the buyers only have the opportunity to carry out a TDD immediately before the purchase in the context of a so-called “Confirmatory DD”.

Who performs a TDD?

Against the background of the importance of a DD examination, investors and corporate buyers in almost all cases commission specialized consulting and auditing firms with due diligence.

Because of its complexity, a TDD always requires collaboration with a specialist. Chartered accountants specializing in Financial DD or lawyers practicing Legal DD are not the right people to contact in relation to a TDD. The above-mentioned questions of a TDD far exceed their expertise.

In a technical due diligence, you should always be a specialized consulting firm. Frequently, the teams of TDD specialists consist of engineers or experienced technicians who have the necessary technical and specialist knowledge for a detailed and successful company audit. When choosing your partner for a technical due diligence, also make sure that the consulting firm has sufficient know-how in the industry of your target company. The list of references of a consultant usually says more about its performance than a company name.

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