In 2019, every company is a software company.
If you are writing and distributing code for consumers or commercial clients (think Microsoft, SAP or Oracle), you are clearly a software company. And it would surprise precisely nobody to learn huge companies outside of the software industry such as Walmart, Toyota and GE rely on crucial computer systems to keep their businesses running.
But let’s be clear about this: every business is a software company, from the Fortune 100 to the smallest start-ups. The wealth of opportunities and challenges presented by the global wave of digital transformation means no company can operate alone.
Because eventually, every business must plug into a broader ecosystem, which requires systems and code…and the world welcomes the arrival of another software company, no matter what it’s actual product might be.
And, of course, deals aren’t going away anytime soon; if anything, they are speeding up. According to Deloitte’s annual report The State of the Deal: M&A Trends 2019, a recent uptick in merger and acquisition activity shows no signs of cooling down. Deloitte’s most recent survey revealed 79 percent of respondents expect the number of closed deals to increase in the next 12 months.
“Deal activity has unquestionably been strong — with the US on a near-record pace for M&A activity through the first three quarters of 2018, with $1.3 trillion in aggregate deals announced,” write the report’s authors.
Which means every CEO needs to take scouting founder Robert Baden-Powell's guidance to heart and ‘Be Prepared’.
British solider Baden-Powell honed his outdoors and survival skills during military service in India and Africa.
He wrote and illustrated his 1908 book Scouting for Boys (a gift that keeps giving for stand-up comics) and gave the world the scouts motto. When asked what, precisely, should scouts prepare for, Baden-Powell answered: “Why, for any old thing."
If your own plans for the future include any outside investment — at any time — or a successful exit via acquisition, you need to be prepared for “any old thing” with the data in-hand to maximize your company’s value.
Be prepared for acquisition or investment
Those companies who have tracked down the most accurate and appropriate data prior to a due diligence check for acquisition or investment will see the most profitable results. This is a well-trodden path for other departments -- in sales, for example, the demands are for clear and accurate bookings information, with positive momentum; increased team effectiveness; and signs of a sales department becoming a “sales engine”.
Today, thanks to the development of powerful business intelligence analytics, similar pathways exist for code and development teams who need to be prepared for acquisition or investment.
This is thanks to the sea change in technical due diligence, where quantitative data informs the subject matter expertise. We’ve written about this before -- see our ebook The Coming Revolution in Technical Due Diligence to discover more about key implications early adopters can leverage for better and faster due diligence.
An incredible opportunity exists for forward-looking companies to go on the offensive long before an acquisition takes place. Now they can understand the questions acquirers or investors will ask about code and teams, formulate answers in advance, and give themselves time to prepare. All in exactly the same framework as that used by future investors.
Here at Sema, we’ve identified three critical time periods you need to keep in mind to make that happen -- to put your code and software teams in the best possible position for sale or investment.
Regardless of size, there will come a day when a technical due diligence is going to play a crucial role in your business fortunes — let’s call it DD-Day.
Senior management may have an actual date in mind. Or it may be aspirational, but unplanned. In either case, it is crucial your entire company prepares with these milestones in mind if is to truly maximize company value when DD-Day arrives.
12-36 Months (or more) Before DD-Day
It is always good practice to “design with the end in mind”. For software and software development teams, that end goal is a comprehensive understanding of the code and software development efforts potential investors are looking for. This end goal should also offer clear proof of a positive trajectory – month on month, quarter by quarter, year after year – and show the code and software teams are improving performance in line with the organization’s priorities.
One of the best ways to do this is to start with a baseline of code quality and development team performance; to understand where the team is today in order to make a fact-based assessment on longer-term plans and goals.
We recommend preparing the baseline now, even – or especially -- when you are aware of potential flaws in code quality or development efforts. Embrace these opportunities for improvement. Investors know perfect software development from the get-go is unrealistic.
But that’s not all -- perfection is not even desirable, as investors understand growing businesses must make trade-offs on time, speed, and quality. They are looking for executive teams who are able to make smart decisions based on good data.
Changes over time are much more important than a single high point. No matter how impressive your software and development efforts are on DD Day, the results will be more meaningful if investors can see them in historical context.
If we return to the comparison with a sales department, it would certainly catch the eye if bookings were triple the budgeted target immediately before an acquisition or investment. But savvy investors (so that’s every single one of them without exception, of course) are looking for signs of sustained progress, not stand-out results in a single quarter.
The same is true for code. Improving code quality over time is significantly more impressive to potential investors than sudden peaks in performance.
12 Months Before DD-Day
A year before a potential DD-Day, it’s time to increase the focus on code quality and rally the troops ahead of inspection. If your company has not yet established the baseline, now is absolutely the right time.
Use the data you have in-hand to set explicit targets with your team, give them the tools to achieve those goals and celebrate the progress towards them. This not only helps deliver improvements in code quality, but also presents a compelling argument that a company’s leadership can set targets and hit them. This is music to investors’ ears.
Of course, one of the many challenges companies face preparing for acquisition is that discretion is essential. Employees and customers need to understand that current execution is the top priority and not be distracted by “what-ifs”.
That is why adopting a continuous improvement effort for code quality typically makes the best sense. From the baseline, set quarterly goals for code quality and development team performance. Work towards them with the proper tools, review the results, and repeat. This not only prevents distractions, it also builds the “muscle memory” required for the data-driven company improvement acquirers and investors are looking for in the next phase.
The day of technical due diligence is here. This is the moment an outside investor is ready to take a stake in your venture, or a much larger operation is looking to acquire the entire business.
For those companies that have followed the correct process, the path couldn’t be clearer: supply your self-assessments, showing progress over time; explain the journey, including the progress and the lessons learned; and then answer the questions about code quality – questions you have already asked and answered yourself because you have years of analytics and data to draw on.
But what if your DD-Day takes you by surprise? What if you find yourself in need of technical due diligence without the benefit of three years of preparation? It’s not too late -- even a last-minute self-assessment helps a company prepare for questions that will inevitably crop up. It is always better to answer the questions yourself first before they are put to you.
Of course, not every company is going to pursue acquisition or outside investment. There are plenty of successful standalone businesses in the world to demonstrate the self-funded model can meet customers’ needs.
But knowledge of code quality -- and improving it over time -- not only smooths the acquisitions process, it also helps deliver on business goals now and further down the trail, regardless of what that path may bring..