It’s widely known that recovering from a cyber-attack can be costly to small businesses, but many entrepreneurs do not realize that their security measures can actually impact their company’s valuation.
It’s understood that if two companies are discussing a merger or acquisition, the potential buyer will perform due diligence from a financial and legal standpoint. However, integrating cybersecurity due diligence into the M&A process is essential for identifying risks that could inform decision-making and negotiation.
Why Security Impacts Company Value
For many startups, especially in the tech space, IT Infrastructure is a core component of the business. If that core is not secure, it raises a red flag for a potential buyer, as it indicates they will need to make investments beyond the acquisition cost.
You might think of it as inspecting a house before making a purchase. If the inspection reveals cracks in the foundation, a buyer is likely to walk away from the deal.
The same is true in business. If an assessment uncovers weak points that could be exploited by a hacker, it may cause the deal to fall through.
What to Expect from Cybersecurity Due Diligence
When a potential buyer performs a cybersecurity due diligence assessment, they will likely explore the following areas:
An evaluation of:
- all the data a company has
- where data is stored
- how data is transferred
This provides insights into data security and privacy risks, as well as identifies gaps.
Prospective buyers do this to understand their risk exposure, especially as it relates to regulatory compliance standards and privacy legislation.
Cybersecurity Risk Assessment
Understanding an organization’s cybersecurity tools and practices has become a standard practice of the M&A process.
- inform decision makers on gaps in compliance
- identify threats and vulnerabilities to information assets
- develop a mitigation plan to prioritize and remediate each risk
Third-party Risk Assessment
The way a company interacts with vendors, suppliers and service providers impacts the overall security of a business.
Professional penetration testing teams carry out simulated attacks to examine systems for exploitable vulnerabilities, as well as social engineering exercises to gauge employees’ security awareness.
These tests provide measurable insight into the real-world risks an organization faces.
Wells Mason often helps perform these assessments for potential buyers, which means we are also in a position to advise startups on how to improve their security measures and make their businesses more attractive to buyers.
Contact us to learn more about how we can help in the merger and acquisition process.