Preparing for M&A or Investment? Don’t Overlook Cybersecurity Due Diligence

As businesses become increasingly digital, the nature of mergers and acquisitions has undergone significant changes. Besides physical assets, buyer companies have to take into account all the digital documents and properties that the other business has. 

They must also analyze their current cybersecurity stance, policies, and software. The last thing that a potential buyer needs is to expose themselves to unwanted risks. Upon merging digital assets, these vulnerabilities might not only jeopardize their new acquisition but also their old files.

Due to the sensitive nature of cybersecurity, companies must perform a complete audit of other companies’ infrastructure. Often, businesses hire a certified managed security services provider to ensure a smooth transition and spot potential risks.

Cybersecurity Due Diligence Basics 

Before signing an M&A contract, buyer companies assess the acquired companies’ cybersecurity risks and posture. The process is vital for identifying potential system threats, liabilities, and vulnerabilities they’ll inherit upon purchase.

The assessment is essential for buyers, as it shows the cost of remediation and the time required to fix the issues. In fact, the process is not only vital for identifying risks, but it can also play a major role in lowering the negotiated price. Companies specifically focus on three areas of cybersecurity due diligence:

• The auditors will consider the company’s culture and cybersecurity awareness.
• Analysis involves incident response plans, risk management, identity threat detection, security posture management, and more.
• There is also an aspect of technical due diligence, where auditors take into account breach assessment, source code review, penetration testing, etc. 

The process of cybersecurity diligence takes quite some time to do properly. This is why you must hire a team of professionals who have done these audits in the past to get the most accurate valuation.

When Is Cybersecurity Due Diligence Done?

The audit can be done at different points of the deal. An older study from 2019 suggests that 38% of senior execs have started the assessment during the strategy creation step, which comes before the start of negotiations. 

The next most common time to do an audit is during target screening (33% of companies perform assessment during this phase. Approximately 22% of companies do their analysis during the diligence and evaluation phase, while 6% execute assessment during integration. 

All in all, most companies will agree that performing due diligence as early as possible gives buyers more leverage. Furthermore, according to the same study, 73% of buyers will back out of a deal if the seller hasn’t disclosed a major cybersecurity problem. 

4 Main Tests During Cybersecurity Analysis 

Buyers love to analyze every aspect of an acquired company’s security posture, but specifically focus on four main areas:

1. Breach Assessment 

During a breach assessment, a company is looking for anything that might indicate that the system is compromised. The IT team will analyze current and prior security incidents, focusing on how they were resolved. Among others, they will take a look at network traffic, logs, and operation centers’ alerts.

The primary goal of breach assessment is to determine the frequency and severity of anomalies. The buyer company is looking for patterns of data exfiltration, unauthorized access, and other issues. 

1. Attack Surface Analysis 

The buyer will perform a full mapping of the attack surface. This should give their IT team a better understanding of potential access points that hackers can exploit. The analysis is conducted at all levels, regardless of whether the seller uses on-premise infrastructure or a cloud-based solution.

Attack surface analysis is vital for identifying future potential issues. Larger attack surface is a major cause of concern, especially if the company has experienced numerous breaches in the past. The IT team can also use this information to develop a post-acquisition strategy that would mitigate some of these risks. 

1. Penetration Testing

These types of tests simulate real-world cyberattacks. During the test, the IT crew will identify potential vulnerabilities that hackers can exploit. As with other audits, it shows the buyer company whether the seller is able to detect and tackle these threats.

The penetration testing results and nature can vary significantly based on the type of business a company is in. In most cases, the process involves testing of internal and external networks, focused product security assessment, cloud security audit, and application security test of critical apps. 

1. Source Code Security 

If a company is buying a tech business, it must also perform a source code security checkup. This type of due diligence is vital when acquiring any organization with proprietary software. During the audit, the IT team will identify backdoors, hidden vulnerabilities, and other weaknesses. 

Given that software companies primarily deal with digital products, these tests essentially determine whether their intellectual property can be compromised in the future. If a product’s source code isn’t properly protected, this might cause a company’s valuation to go from 100% to 0% in a second. 

Advantages of Cybersecurity Due Diligence 

Although it might seem that due diligence only benefits the buyer, there are also good reasons why sellers would do it. In fact, whether you like it or not, it is a standard process that is necessary when striking modern business deals.

Benefits for Buyers

If you’re a buyer, you want to know what you’re dealing with before signing a multi-million deal. Identifying vulnerabilities is not only vital for your finances, but it can also prevent reputation damage down the line. Proper assessment of the seller’s cybersecurity posture makes compliance much easier and prevents future fines. 

Benefits for Sellers

Companies that have heavily invested in their cybersecurity over the years can get a much higher valuation after an audit. Furthermore, by disclosing audit findings, sellers can attract many more companies, giving them significant leverage during negotiations. 

Last Thoughts 

As you’re preparing for a merger or acquisition, you must assess the seller’s cybersecurity policies and infrastructure. Once you’re aware of all the vulnerabilities, you’ll be able to tweak the price accordingly. Furthermore, the audit gives you a chance to get out of an unfavorable deal.