Cyber Due Diligence: Are Cyberthreats Lurking Around the Corner?
An acquisition can create opportunity for both the target organization and the private equity (PE) firm behind the deal—but it also introduces significant cybersecurity threats.
These large financial transactions are quickly attracting cybercriminals, and malicious actors are exploiting the urgency and fast pace of these business deals. Today’s target companies are often bombarded by hacking attempts and phishing scams once a deal is publicly announced. Cash is king to cybercriminals and the ultimate crown jewel that is sought by cybercriminals.
As information security issues continue to rise in today’s environment, PE firms and everyone associated with the deals (e.g., family offices, independent sponsors, search funds and even strategic acquirors) must specifically consider cybersecurity threat actions and actors before, during and after the due diligence process to make informed decisions prior to the deal.
But when it comes to cyber due diligence, there are many misconceptions about cybersecurity and what businesses should do to protect themselves and safeguard company data. Unfortunately, these cyber myths often prevent businesses from taking the right actions at the right time, placing both deals and data in jeopardy.
That’s why we’ve outlined some of the key cyber due diligence considerations for PE firms below.
Four Cyber Due Diligence Considerations for PE Firms
1. Evaluating the Target Company’s Technology Infrastructure
A review of the target company’s technology infrastructure, including its software, hardware and network systems, is a critical first step in cyber due diligence.
Outdated network equipment, systems and applications not only represent a potential large up-front cost to a buyer, but they may also signify multiple vulnerabilities or weaknesses that could be exploited by cybercriminals.
If not already implemented, we recommend that internal vulnerability scans and external penetrations be incorporated into the cyber due diligence process to assess the company’s infrastructure and systems. Multi-factor authentication should also be a priority if it isn’t already implemented.
2. Assessing Third-Party Risk
The unfortunate truth is that third-party data breaches are becoming more widespread. Organizations are increasingly outsourcing key functions to third parties in an effort to focus more on their own business goals and objectives while lowering costs and taking advantage of the knowledge and expertise third parties can provide.
3. Evaluating the Incident Response Capabilities
As a part of cyber due diligence, PE firms must evaluate the target company’s incident response plan, including its procedures for responding to a cyberattack, data breach or other security incident.
We continually see organizations primarily focus resources on preventing attacks, while the detection and response capabilities are often lacking. We recommend a review of the company’s incident response plan, capabilities to detect and respond to attacks as well as periodic testing of the plan.
4. Evaluating the Cyber Awareness Culture
Oftentimes while a company may check all of the compliance must-have boxes during the cyber due diligence process, the overall security mindset of the company’s leaders and people are a concern.
Cybersecurity is not a technology problem; it’s a people problem. And a team’s negative mindset toward cybersecurity could potentially undermine even the most thorough cyber plans and best practices.
Ensuring that a system of top-down buy-in to the overall security awareness is crucial in evaluating a company’s security posture.
We recommend implementing periodic email phishing training for employees. When it comes to a company’s leadership, it’s critical to ensure that leaders have a cybersecure mindset and are considering cybersecurity as part of the organization’s overall strategy.
It’s also important to periodically review any security awareness training programs in place to evaluate their adoption and effectiveness. The more employees know about vulnerabilities, the better they can protect against them.
Learn More About Cyber Due Diligence for PE Firms
Cybersecurity and cyber due diligence are critical considerations for PE firms when evaluating potential investments and understanding future costs.
In today’s digital age, all organizations—regardless of industry or size—are vulnerable to cyberattacks that can have far-reaching and long-term consequences for their reputation, financial stability and operations, which makes cyber due diligence an essential for our current environment.
A thorough evaluation of technology and cyber risk through cyber due diligence will prove to be valuable for PE firms to gain a comprehensive understanding of any potential cyber strengths and weaknesses of the target company and can help protect investments and ensure long-term success.
To learn more about what cyber due diligence may look like for your specific PE firm, how to institute risk assessments, how to train employees about cybersecurity or how to create a culture of cybersecurity awareness, reach out to your Warren Averett advisor or request contact from a Warren Averett cybersecurity expert.
This article was originally published on February 13, 2023 and most recently updated on April 1, 2025.
