Within the private equity industry, due diligence is second nature. It’s the essential process by which a prospective acquisition target is, at least in theory, thoroughly investigated to enable the buyer and seller to reach a fair market value. But some due diligence undertakings are less diligent than others, and it’s rare that every department gets the attention it deserves. One key area that too often goes overlooked: technology.
The Value of a More Comprehensive Due Diligence
As the beating heart of business, a company’s technology environment deserves particularly close attention during due diligence. That’s because it can reveal otherwise obscured factors that might boost or undermine value and which can have an outsized impact on the ease of integration post-transaction.
Technology systems are bespoke, labyrinthian, and can be difficult to parse. But, for buyers, closer attention can help reach a more accurate assessment of value and preempt integration headaches. On the other side of the table, sellers should be prepared for their technology systems to face scrutiny. Only with functioning, modern, and capable systems can a business realize its maximum value. Here’s what buyers and sellers should consider as it relates to technology during a transaction.
Sell Side Technology Due Diligence and Cybersecurity
Like a homeowner hosting an open house, active business sellers are likely to see a lot of unfamiliar faces. Your security measures should be primed for the possibility that not all of these visitors have honest intentions. That means remaining vigilant and equipping your IT team to monitor and respond to threats. High-profile, post-acquisition security breaches and their consequences tell a compelling cautionary tale – hackers may see smaller businesses as relatively easy targets to infiltrate and their acquisition as opportunities to spring long-dormant traps.
Further, sellers can do themselves and potential buyers a favor by modernizing technology systems prior to entering transactions. A business may be getting by on its legacy systems, but astute buyers will pay close attention to technology and related practices. The headache of modernizing antiquated systems or fixing broken processes post-deal could doom an otherwise promising deal.
Buy Side Technology Due Diligence
For an acquisition target to appeal to a buyer, it needs to ‘fit in’ with the broader organization and portfolio. That often goes beyond representing revenue, profitability, and cross-sell opportunities to include consideration of the integration process. It’s not always cost-effective to make major tech investments immediately after an acquisition. Understanding a target’s data practices is necessary to determine whether it can ‘talk’ with other related systems and the data on hand. If a target company’s existing systems can, for example, share with or talk to an existing accounting system, the result goes beyond saving the accounting department time in reconciliations. The wider goal is to standardize key information, access data for timely decision making, and enable smoother cross-selling opportunities.
Taking a deeper dive into a target’s analytics can also reveal more details on key assets, like top salespeople and accounts, and where risks, inefficiencies, and tech deficiencies might negatively impact value. Should serious concerns arise, technology due diligence might inspire warrants and covenants that keep the deal on track while protecting against post-acquisition risks.
With Due Diligence Done…
Good due diligence is the foundation of a great deal. That’s true for buyers and sellers alike seeking to maximize the value of a deal. Technology is so central to modern operations that it deserves closer scrutiny in the due diligence process. With areas of concern identified, remedial steps involving IT teams, applications, hardware, and cybersecurity can be implemented to ensure sellers receive full value and buyers enjoy a smooth post-transaction process.
If you have any questions about assessing IT in anticipation of, or during, the due diligence process, contact CBIZ today.
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