A client recently acquired a company with an embedded software product that, according to all customer comments and due diligence reports, was of high quality. It was the plan of our client to integrate the acquired product with its larger enterprise application. Several months into the project, an esoteric measurement of software quality raised its head: Change Tolerance.

Change Tolerance describes the ability of software to survive change. Rather than an objective metric, it is a subjective measurement that is rooted in a complicated combination of code complexity, code dependency, test coverage, build processes and automated testing frameworks.

Other composite measurements, such as Defect Resistance and Quality Risk also require specific knowledge regarding not only the code that is currently compiling, but also the path and processes used to bring that code to fruition.

Rarely do the history, processes and measured code quality result in an acquirer walking away from a deal…too many other factors influence a decision to acquire. But objective and knowledgeable assessment of the true quality of existing software provides excellent negotiating leverage.

We worked with our client to eliminate the issues that affected the Change Tolerance of the product. But those costs could have – and should have – been passed onto the seller, rather than absorbed by the acquirer.

A unique offering we provide to organizations who are pursuing acquisitions is a historic quality assessment; where we assess code and process quality both in present terms and as a trend over time in the organization. These assessments can show the impact of the loss of a “star” performer, the drop in quality due to aggressive release cycles, negative impacts from change of technology or – for the best companies – a demonstrated pattern of consistent and well-applied quality practices.

Other subjective measures such as accounting records, corporate values, quality of management team, competition and intellectual property can affect valuation. But, in the case of software technology acquisitions, software quality is unique in its ability to be supported by meaningful metrics and its direct correlation to the value of the acquired assets.

Engaging in a software acquisition without an outside, objective assessment of core product quality can leave millions on the table in terms of unaddressed valuation concerns.