Buyers conduct deep diligence on proprietary software to:

• Confirm legal ownership of the code and related IP
• Assess scalability, performance, and technical debt
• Identify third-party or open-source dependencies
• Evaluate cybersecurity posture and regulatory compliance
• Understand how it contributes to revenue (if licensed or sold)
• Ensure the business can continue operating post-transaction
  

📂 What Documentation Is Reviewed in Diligence

Below are the core areas of software diligence, based on our checklist used in real transactions:

01. Development

• Software Architecture & Design Documentation – Frameworks, platforms, and system design
• Product Roadmap & Scalability Plans – Future development vision and planned upgrades
  
• Software Development Life Cycle (SDLC) – Processes for coding, testing, deployment
  Agile/Scrum Workflow Documentation – Sprint planning and team organization
• Third-Party Development Agreements – Contracts with outsourced developers
• Client & User Metrics – Number of active users, adoption trends, and churn
  

02. Licensing & Ownership

• Software License Agreements – Ownership terms and licensing rights
• Invention Assignment Agreements – Proof that employees/contractors assigned IP to the company
• Content Distribution Agreements – If the software distributes media or digital content
• Proof of Ownership – Signed contracts confirming the company’s IP rights

🔐 Buyers want to see a clear chain of title to the software. Missing agreements with contractors can be a red flag.

03. Source Code & Dependencies

• Source Code Repositories & Version Control – GitHub, GitLab, etc.
• Open-Source Component Inventory – Including licenses (MIT, GPL, etc.)
• Codebase Documentation – Clear explanation of structure and dependencies
• API Documentation – Internal/external integration points
  Testing & QA Policies – Automated testing, coverage stats, and CI/CD pipelines
• Code Review Policies – Internal review processes and quality controls
  

⚠️ Use of open-source libraries without license compliance is a common diligence issue.

04. Performance & Scalability

• Hosting & Infrastructure Documentation – Cloud (AWS, Azure, GCP) or on-prem
• System Uptime & Error Logs – Historical performance reports
• Load Testing Reports – Can the software scale as usage grows?
• Disaster Recovery Plans – Recovery strategies in case of failure
  

05. Security & Compliance

• Security Audit & Penetration Test Reports – Third-party and internal assessments
• Data Encryption & Access Control Policies – How user and system data is protected
• Authentication Mechanisms – MFA, role-based access, API security
• Compliance Certifications – SOC 2, GDPR, HIPAA, etc.
• Static & Dynamic Code Analysis – Use of SAST, DAST tools like SonarQube
  

🔐 Security is one of the most scrutinized areas, especially for SaaS products with multi-tenant environments.

06. Customer Use & Revenue

• User Documentation & Training Guides – For customer onboarding and internal use
• SLAs & Customer Agreements – Support levels, uptime guarantees, refund terms
• Revenue Attribution Reports – If the software generates recurring or transactional revenue
• Adoption & Usage Metrics – Churn rate, renewal rate, usage depth
  

🚩 Common Red Flags in Software Diligence

• Missing IP ownership documentation for key code
• Excessive reliance on unsupported or outdated frameworks
• Lack of test coverage or performance monitoring
• Unclear licensing of open-source components
• Poor documentation of APIs or integrations
• Inadequate access control or data security practice
• No visibility into customer usage metrics
  

Final Thoughts

For companies with proprietary software—whether used internally or sold externally—diligence goes far beyond “does the code work?” It’s about ownership, scalability, reliability, and defensibility.

If you’re planning to sell or raise capital, take inventory of your software assets now. Clean, organized documentation can preserve valuation, reduce closing risk, and accelerate the deal process.

📩 Need help preparing for technology diligence? The team at Colonnade Advisors can guide you through every step.