Product Due Diligence Guide for M&A
- Jon Schipp
- Dec 12, 2024
- 16 min read
Updated: Jan 14
In my current role as a product strategist, focused on innovation, I am involved in a lot of M&A related actions. I regularly meet with founders and evaluate their tech and teams. I wanted to take some of my experience and share it with you all, as I had to learn much of it during the process.
This document is designed to be a guide for a tech & team due diligence process from the product leader's perspective. It goes through the typical phases of diligence, acquisition, and post-merger and provides guidance and examples along the way. Not all processes will be the same, but this is how I have done.
Who is this For?: If you're a product manager going through diligence on your first M&A or partnership deal, or someone in an adjacent function that would like to better the process and how it all works this article is for you.
Product Diligence Goal
Goal: The goal of product due diligence is to uncover all the risks, challenges, and strengths associated with a vendor (target).
This document outlines a general flow for product due-diligence: work that is necessary to evaluate a vendor solution with high confidence for the purposes of M&A. Some aspects could apply to partnership (e.g. OEM) as well. The goal of product diligence is to uncover all the risks, challenges, and strengths associated with a vendor’s (target) which includes:
PMF (Product-Market Fit)
Product strategy and formulation
Product technology (including its features, scale, limitations, etc.)
Product use-cases and whether they are adequately met
Product roadmap, commitments to customers, and planned release schedule
Its leadership & PM team, including their personalities, skillsets, liabilities, and way of working (i.e. what skill level are they performing product management at?)
Its customer base dynamics (segments / type, value, JTBD, retention risks, champions)
Product experience, customer deployment, user onboarding and the full customer journey
All of these things (and probably a little more) need to be evaluated to determine if the target will impede or impact the ability to achieve the value drivers of the partnership. The value drivers are the business objectives developed by the acquiring company. The diligence process, which requires significant planning, is a combination of a technology & people evaluation in tech & team deals, we should be able to assign a level of confidence as to whether our company goals will be met with a likelihood.
Examples of product diligence success criteria include:
Target team actively invested in organization's future and identifying ways to impact customers with their experience/expertise
Target team are experts in their respective space, including customer needs and effective data presentation
Target's product roadmap is aligned with organization's annual product strategy
Current customer roadmap commitments are enumerated and prioritized in line with organization's annual product strategy
UI can fit within the organization's experience, leveraging SSO security logins, and platform navs
Technical debt within the vendor's product is enumerated and prioritized in line with organization's annual product strategy
Target's offering can be reasonably optimized to achieve an x% Gross Margin within 12 months post-acquisition
Product & Engineering teams' capacity to meet 60-day and 6-month development timelines are identified & reserved pre-close
Target has confirmed the development milestones are achievable at the quality/scale required within x days
Target's onboarding experience is either in line with organization OR could be reasonably tailored to meet requirements
The diligence process will typically be carried out by the deal team under the advisement of an executive sponsor (SVP) and the ELT (Executive Leadership Team) but may look different depending on the organization and whether they're public or private.
Deal Team
If you're the lead product manager assigned to diligence on an acquisition, you're probably on the deal team.
The deal team is a select number of key stakeholders from different departments that are trusted to evaluate the vendor with limited bias and commitment to achieve the organization & customer goals. All core diligence is carried out by the deal team. However, other types of external diligence can be carried out as well from the Board for example but they're not often part of the deal team.
The deal team will include counterparts in:
SVP or Executive DRI (Directly Responsible Individual)
Business Development / M&A
Legal
IT
InfoSec
Engineering
Product
Marketing
Finance
Accounting
Sales
There will also typically be a subset of the deal team that are engaged in conversations with more sensitivity. For now, I will call this subset, the core deal team. In most cases, the lead product leader will likely be in the core deal team as well.
Diligence Phases
There are typically 5 phases of diligence that are based around the signing of the LOI (Letter of Intent) which is where we enter a binding agreement with another organization. The general four phases are outlined below
Pre-Work - Develop the value drivers, guidance and strategic plans to inform which targets to pursue for evaluation
Pre-LOI - Evaluate vendors with the sole purpose of weeding out the ones that do not meet the needs of your organization. It requires an NDA and typically includes a product demo, several remote calls with the leadership team, and several days onsite with the target leadership and the deal team to evaluate the team & technology. At small startups, this is typically the founding team (Founder, Co-Founder) and the most senior engineering leader, and sometimes a Corp Dev leader or Product Leader.
Post-LOI - Once a target passes the pre-LOI phase, then the goal is to sign a LOI with the vendor, enabling us to exchange confidential information in more detail. Once the LOI has been signed, the deal team engages with the vendor for a period of 30-45 days (typically) to perform deep dives into aspects of the business including finances, employee history & compensation, and more.
Close - Deal has been closed i.e. the transaction is official. A public announcement often occurs the same day at public companies, and then a short celebration ensues.
Post-Merger - Immediately post-close the clock starts on post-merger workstreams which involve providing equipment (e.g. laptops) to new employees, general onboarding & assimilation into the acquiring company, and then planning & execution begins on product integration and GTM.
Pre-Work
Before proper diligence can be completed, prework must be completed along with alignment around it. You must know what measuring stick to evaluate the vendor against so that you can develop the respective evaluation plan in the Pre-LOI and Post-LOI phases.
This requires understanding the value drivers, success metrics, and strategic value of the partnership.
Value Drivers
The most important thing is to understand the goals of the partnership, so start with the value drivers of the deal. The value drivers are often lead by the corporate business development team with feedback from ELT.
The value drivers are the business objectives from which all other things will cascade.
Here’s a high-level example of Value Drivers for a tech & team deal. Depth is needed over the high-level examples, as they should be measurable and concrete.
Value Driver (Discrete deal objective) | Success Factor (Requirement to reach objective) | Success Criteria (Indication of meeting objective) |
Innovate Offerings | Sound DevQA/test process | Evidence of effective and market-responsive SDLC |
Innovate Offerings | Sound DevQA/test process | Reduction in product defects post-launch and decreasing defect rates |
Innovate Offerings | Deep understanding of and alignment with customer needs and market trends | Increase in CSAT scores |
Innovate Offerings | Deep understanding of and alignment with customer needs and market trends | Product recognition from reputable reports or thought leaders |
Innovate Offerings | New ideas and products are protected through patents and copyrights | Patents are filed and granted, and copyrights are registered |
Innovate Offerings | Target's data, applications, systems and networks are reasonably protected from pilferage/theft | Sufficient evidence of robust cybersecurity program |
Innovate Offerings | Product is interoperable with acquirer's products and services | Product(s) can be integrated into organizations offerings - to the necessary degree - within x months |
Innovate Offerings | Data structure is scalable and aligned with product strategy | Data structure & architecture meets short- and mid-term roadmap requirements |
Grow ARR | Increasing presence in existing or new markets | X% Y-o-Y growth in ARR |
Grow ARR | Increasing presence in existing or new markets | <5% monthly and annual churn rate |
Grow ARR | Ability to retain existing and acquire new customers | Presence of reputable logos |
Grow ARR | Ability to retain existing and acquire new customers | Positive product reviews from current customers |
Retain Talent | Identification and retention of critical target personnel | Current employees are sufficiently incentivized for the next 12-18 months |
Retain Talent | Identification and retention of critical target personnel | Low historical employee turnover rate |
Retain Talent | Alignment with acquirer's culture | High current employee engagement & alignment with organization's Core Values and culture |
Each one of these drivers, are goals that GTM and the Integration plan are aligned with.
Success Metrics
Align on the business success metrics of the deal such as customer growth, attachment rate, net-new revenue, etc. Develop these metrics in conjunction with the core deal team and ELT. Begin by working with the executive sponsor (SVP) and ELT to understand their views on the state of the business and what they want to achieve. From that information, negotiate and align on achievable but aspirational targets that best represent the customer and organization's interests.
Success metrics should be in the model used by your organization which may be OKRs or KPIs. Align with the model and company goals so it's easy to communicate.
There will be business success metrics (e.g. revenue, transactions) as well as GTM (e.g. demand gen) and product (adoption) success metrics. Also, have metrics to evaluate each of the functions along the way so we can learn from each deal. For example, ask the greater sales team if they knew about the capability, and are confident in selling it to customers which measures GTM effectiveness at communicating the value of the solution.
This is an example of a Product success metric for a startup in a nascent market, based on the GTM goal of acquiring 30 customers. These Key Results (KR) evaluate the value that customers receive from the initial product which will factor in their ability to accomplish the job, the experience, and the quality of it.
KR | Receive feedback from 50% (15) of participating customers within 30 days of pilot launch | ||
OKR | Quickly deliver, test, and validate product market fit with POC from our target cohort | KR | 75% of customers that provided feedback (22) believe the tool will solve an immediate critical gap in their JTBD |
KR | 50% of participating customers (15) are committed to continuing the pilot |
Public Vendor Evaluation
Use online sources such as company websites, Youtube, podcasts, market analysts, customers, etc. to review the marketplace for vendor solutions. This will equip you with the information needed to understand the solutions at a high-level and the problems they solve. Take detailed notes and start developing a list of questions that need to be answered in the pre-LOI phase.
For example, in reviewing vendors for y, we looked at the typical competitors from a Google search and market analysts such as Gartner, but also looked at adjacent technology vendors to see what similar capabilities they have, checked for Youtube channels from each vendor, as well as podcast or marketing spotlights, reviewed any public facing documentation, and talked to our internal sales teams and our networks to see what vendors they’re hearing about from customers.
GTM Plan
Develop a high-level GTM plan in partnership with PMM, M&A, and Sales. This plan will likely change in its details but should be directionally accurate based on the Value Drivers and Success Metrics defined above. For example, if the intention is to bring in revenue quickly, then you will need to figure out how to bring the product to market quickly, knowing the typical sales cycle, the value of the product and how much it will resonate with customers, and the customer segment or base you want to go after.
Here’s an example of an aggressive phase of a GTM plan focused on fast customer expansion and PMF validation. To accomplish this, we intended to start selling a standalone (add-on) post-acquisition as fast as we could to get customers to POC (for PMF validation), and get a % of those customers close by EOY. This plan was developed by the product leader in conjunction with the M&A and PMM team, based on the Value Drivers and Success Metrics.
Integration Plan
Next, develop the tentative product integration plan (i.e. the product roadmap to integrate the vendor solution) that will enable the company to achieve the success metrics, GTM plan, and the value drivers.
It’s normal for the integration plan to change as you learn new information but it should be directionally accurate. The Pre-LOI and Post-LOI phases will provide some of that new information when you learn e.g. that features are not meeting expectations or discover there is a quality problem. Other areas that affect the integration plan will be how quickly we need to bring the product to market, what types of customers we want to serve initially, etc.
It’s best to break the integration plan into a set of individual workstreams, and capture estimated capacity needed from your organization to accomplish. Post-LOI you will have enough information from the vendor’s laborforce to conclude who is needed and able to help achieve goals.
Product Requirements
Goal: Analyze the alignment of core functionalities with customer needs.
Develop a set of product requirements needed to achieve the goals and integration plan above, as well as nice to haves. Organize the list by category of requirement and the value: low, medium, high in prioritization.
As an example, in my most recent acquistion I developed over 100 requirements for diligence by sourcing information from public use-cases / vendor websites, our internal infosec team, our customers, and our IT team. We then sent these requirements to the vendor to have them fill out whether they are met, or not, in the Pre-LOI phase (see below).
From that list, the PM’s responsibility is to prioritize and then validate the requirements based on needs from the integration plan and value drivers. In the next phases, you will do a deep dive on key requirements (since in some cases it's not realistic to do them all, especially with time pressure) with the vendor to understand whether they’re met or not in the vendor’s solution, and what work is required to achieve. Add that work to post-integration roadmap.
Pre-LOI
At this stage, the vendor has signed an NDA and possibly a Non-Compete with your organization and now we’re able to get into more detail for evaluation. This phase will typically include one or more onsite meetings with the vendor's leadership team.
Product Review
Obtain product access and perform a review of the customer experiences & capabilities.
Document gaps, and features and how well they meet expectations today
Use the product reviews to help guide the product success criteria
Product Deployment & User Onboarding
Goal: Directly assess the deployment & onboarding process to understand the time to value.
You should deploy and use the product so you can experience it like a customer would to understand the process, and identify gaps that need to be addressed. In addition, you should use it internally in production by your IT or information security team to validate proof of value.
Success Criteria
Goal: Gain a lay of the land understanding of how purported product meets customers needs.
Have each vendor asynchronously complete the requirements sheet you developed previously, with instructions to mark which requirements are supported or not, along with any notes and documentation. These requirements will be validated in detail in the Post-LOI phase.
Consolidate each response into a master sheet where you can evaluate the strengths and weaknesses of each vendor, go through these line by line and mark which ones are important enough to verify with the vendor, or that you may have low trust in. Use this sheet as a main source of your product diligence in the sessions with the vendor.
Customers
Obtain a list of the mutual customers and their revenue
Understand the customer dynamics: segments, value received, length of contract
Go through a customer deployment to understand the tech and pains
Go through user onboarding to understand how well customers receive value
Go through the customer journey map to understand how customers go from A to C.
Leadership Team Evaluation
Goal: Determine if team will partner with success, are not a liability, and have a high probability of achieving goals
Take notes of interactions with the leadership team to understand strengths, weaknesses, and liabilities going forward. In addition, learn how the company performs product management, what styles, methodologies and culture do they have / use / provide.
1. Are they strategically aligned with your organization's mission and vision?
2. Are they excited and motivated?
3. Do you believe we will succeed together in the future?
4. Do you trust them?
5. Are they able to clearly articulate their value and direction?
6. How well do they know their customers?
7. How much do they care?
8. How well do they fit within our company culture? Do they have similar values?
9. How knowledgeable are they in their respective industry?
Plan to spend time with the team after hours to get a better sense of their person outside of a work setting. This is incredibly important as you start to get to see how they act in a non-formal setting, with their guard down. We have found some very interesting things in this phase, that indicated potential liabilities in the past.
Product Roadmap
Obtain a preview of the vendor’s product roadmap to understand their direction and how well it aligns with your organization's goals.
Review GTM Plan
Present a high-level version of the GTM plan with the vendor and walk them through to get their feedback and evaluate their level of alignment.
Deal Structure
If you’re on the core deal team, review and align internally with Executive DRI on the deal structure and incentives to make sure they’re aligned with the goals of the GTM and integration plan.
For employee incentives, such as earn-outs and bonuses, it’s key to make sure they align with integration plan, product delivery and GTM milestones. Product needs to identify the key milestones that should be included for incentives. If these align well, then the team, in an acqui-hire, will be more motivated to succeed on the integration plan.
Earn Out
The earn out document, which is another incentive based document for the acquiree, should includ customer related goals that need to be met. This could be to drive expansion with ARR or customer transaction targets. A set of multiple earn-out milestones are recommended to provide one incentive after the other. At it's simplest it could look like this: Milestone 1 - Acquire 100 customers by Dec 31st 2024
Milestone 2 - Acquire 250 customers by July 31st 2025 Milestone 3 - Acquired 500 customers by Dec 31st 2025
...
Bonus
This is another type of incentive, that is used in addition to the earn-out to continue to drive momentum and progress for the acquiree. The earn-out is defined as more of a OKR type goal while the Bonus in my experience is oriented more around product deliverables that will enable the team to hit that goals in the earn-out. We have found great success in aligning the bonus with key product delivery milestones in the integration plan. It’s recommended to have multiple milestones, and for them to be date bound to have a drum beat of incentives for the team to achieve.
Below is an example of bonus incentive milestones, which was focused on the integration plan for 6 months. Our product and engineering due diligence indicated that these could be achieved by the milestone data if the team worked hard and stayed focused.
Bonus Incentive 1: Deliver integration of x solution into the platform by October 31st, 2024
Identity / SSO integration
AWS Deployment in all US regions
Deliver new marketplace of data connectors
Bonus Incentive 2: Co-develop and deliver with x's leadership team by March 1st, 2024
Feature X
Feature Y
Vendor ELT Readout
Upon reviewing several vendors, the deal team will compile all the data that we have and put together a point of view that will be presented to the Executive Leadership Team for feedback and approvals. This is typically led by Corp Dev with the core deal team.
Board Review
If the intention of the diligence is to identify a company to acquire, there may need to be a review with the Board of Directors M&A Committee to provide feedback and approve the purchase. This is a requirement in some states for public companies.
Post-LOI
A contract called the LOI (Letter of Intent) has been signed, and in my experience this phase last from 30-45 days. This contract indicates that both parties intend to do business and this usually opens the "deal room" - a name for a secure channel where confidential information about a business is shared to the core detail team. The final aspects of diligence are completed in this phase now that the books are open for analysis and review. There are several onsite sessions with both parties, it could be 10 or as many as needed to have confidence in going forward.
Cross-Functional Capacity Planning
Goal: Post-Acquisition Integration Strategy: Develop a plan for integrating the acquired team and product, focusing on leveraging central resources efficiently.
Work internally with stakeholder leadership and counterparts to prepare for cross-functional capacity required to make the deal successful. This especially includes product, engineering, design, and GTM.
Customers
Review customer base in more detail including adoption metrics (if available), customer health, and mitigation / migration plans.
Identify at-risk customers and take action to develop retention strategies post-close.
Understand the value customers are receiving which includes their use-cases
Review product gaps that are affecting customers
Understand any outstanding commitments or promises made to customers
Make necessary trade-offs in product plan
Product Weakness Review
Review weaknesses in the product in further detail such as customer pain points, data disparities and issues affecting the products ability to scale. This is a critical area to understand in detail, as it will determine cohorts for GTM & product plan. E.g. if the product slows to a crawl at 100GB of data, then we can not go after enterprise customers until that’s addressed, and have to slow the delivery of the number of customer.
When you lose to competitors, why do you lose?
What are the top product potholes that need to be addressed?
What are the largest customers / most adopted and what problems do they run into?
What would you like to spend time on that you have not been able to?
Review Integration Plan
Present the integration plan with the vendor and walk them through to get their feedback and evaluate their level of alignment.
Success Criteria
Goal: Validate that product meets customers needs.
Perform a technical deep dive on any key features & requirements needed to successfully complete the integration plan. This will be the 3rd time going through the success criteria sheet, which is your last opportunity to feel confident in how the product as it stands today meets customer needs. Use this time to update the integration plan with this new information.
Product Commitments
Understand any communicated commitments to customers, as well as the vendor’s scheduled roadmap workstreams. Determine which ones we need to stop or continue with as part of the integration plan.
Staffing Plan
1st, review the vendor’s labor force which is likely only available to the core deal team. Determine gaps, strengths, and where Product and related specialty headcount will be placed in the organization should the deal close.
2nd review proposed integration staffing plan with vendor for feedback. The plan includes all the workstreams they will need to execute on post-close, and who is best to own these areas from the vendors POV, and who to retain and to keep based on business needs.
Close
Deal has been closed and we enter the official partnership or M&A phase, clock starts on execution.
Post Merger
Ramping of several work streams begins to eventually have everyone fire on all cylinders toward achieving the business goals.
Team Onboarding & Assimilation
The new team gets onboarded with IT, among many other things and may begin working out of the acquiring companies' office. Assimilation into the culture begins.
It's very important in this phase to communicate regularly with the new team and their leadership to check on their onboarding progress, help unblock them as needed, inspire them toward the objectives ahead, and be transparent about where you're going together and how to get there.
Post-Merger Program Management
If acquisition, the post-merger Integrations team begins program management of bringing the target company in-house. Several members of the deal-team are stakeholders of the post-merger meetings, especially those accountable for employee and customer retention goals as well as growth goals. This may be a weekly meeting to check progress on all workstreams.
Post-Merger M&A Committee
If acquisition, bi-weekly or monthly review with the M&A committee to track & report on progress with senior leadership.
At public companies, there will also be regular status updates to the Board of Directors to keep them informed of progress, challenges, and attainment to goals.
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