As a whole, due diligence is a multi-pronged effort, usually initiated by the potential buyer. It is an extensive process that takes a big-picture look at the state of the company being purchased, from their financials to their future product lineup, to their overall corporate culture. Technology has taken on an increasingly important role when it comes to a business’s operations and future prosperity. Although technology due diligence rarely reveals deal-killing information, it has proven to save companies thousands of dollars during the transaction. As such, technology-based due diligence should play a role in the M&A process.
Below are the top five benefits inherent to performing a technological review as part of your greater due diligence efforts during a merger and acquisition.
Technology Due Diligence: A Definition
Before we begin, it’s useful to establish a working definition of technology due diligence. This provides a better understanding of its role in the overall M&A process.
Technology due diligence composes all the IT and IT-adjacent oversight activities necessary to gauge both the technological capabilities, weaknesses, as well as overall health of a company. This type of audit focuses on computer systems, cybersecurity, data collection and usage, intellectual property, proprietary product components, and any other technologically-focused aspects of the company in question.
Note that technology due diligence plays a critical role. It uncovers gaps or weaknesses in a company’s technological implementation. Therefore, tech-based diligence is as much about auditing the processes that accompany the merging entity’s tech stack as it is about the stack itself.
It Improves the Success Rate of Your M&A
When concepts like corporate culture and synergy are stripped away, the overarching goal of any merger and/or acquisition is creating a new entity that is more profitable than its constituent parts. Due diligence, regardless of the audit’s area of focus, maximizes the resulting return on investment (ROI).
Far too often, the acquiring company will focus on financial due diligence to achieve a more transparent and successful merger. Executives would be wise, however, to include a full review of the merging company’s tech capabilities in order to improve the overall success of the M&A. Companies that fail to perform a holistic assessment, including technological assets, prior to the merger see low success rates post-merge. After all, extra attention to technological capability during the planning phase is a key driver of post-merger prosperity. Additionally, tech diligence serves as a superb indicator of projected growth in the transaction’s aftermath.
It Strengthens Negotiating Positions for More Favorable Valuations
In today’s world, technology has value. From software to robotics, automation to virtual workspaces, a company’s tech stack determines the business’s ability to respond to changing market factors with increased agility.
In order to determine that value, however, a thorough analysis must be completed. With a clear picture of technological assets and capabilities in hand, the acquiring company can better position itself during the final phase of the M&A process via more accurate valuations. In short, having an accurate picture of a company’s tech stack provides the acquiring business with added leverage from which to negotiate. According to a Pitchbook interview, information discovered during due diligence can result in up to a 30% discount on the company’s final sale price.
It Provides a Comprehensive View of Intellectual Property and Technological Assets
Uncovering assets serves as the cornerstone of any technology-based due diligence process. Understanding the value of a company’s assets and IP —for better or worse— enables you to arrive at better valuations, and more proactively negotiate the purchase price.
Understanding the range of tech capabilities, assets, and processes the potential seller owns serves a two-fold purpose. Establishing a tech blueprint gives you a comprehensive view of high-value assets. It can also show you outdated or underperforming assets. From there, you can adjust your pre-merger game plan and your post-merger goals.
It Reduces the Time Needed to Meet Investment Goals
Sustained profitability is the primary goal of any merger process. During the general due diligence process, one of the most important documents the acquiring party needs to review is the seller’s strategic plan going forward. Oftentimes, a company’s strategic forecast is the impetus for the M&A in the first place. Uncovering tech assets helps to expedite those goals.
Understanding the full range of technological assets at your disposal allows your post-merger company to leverage those assets more effectively in pursuit of new markets and aggressive sales goals. In turn, the time it takes to achieve your strategic benchmarks will rapidly shrink when you involve proper diligence.
It Improves Cybersecurity
Due diligence doesn’t just help identify assets; it also helps to uncover risk while ensuring a high level of business continuity after concluding the merger. Cybersecurity is central to that idea.
Tech-based due diligence may serve to verify the existence, effectiveness, and scalability of the seller’s tech stack. It also helps to uncover vulnerabilities. Past data breaches might not be readily apparent until tech diligence is completed. However, these breaches will have a material effect on your company’s prosperity whether you identify them beforehand or not. Tech-based diligence lets you get ahead of the curve, protecting your newly acquired assets in the process.
In Summary
The merger and acquisition process is complex and multi-faceted, even for industry veterans. Technology due diligence enables companies to identify potential technology value and security risks in a deal and lays the foundation for successful integration. Reduce uncertainty and foster better post-merger outcomes by integrating a tech-based diligence in your next deal.
ABOUT LIBERTY ADVISOR GROUP
At Liberty Advisor Group, we understand the fast-paced nature of M&A deals. We accelerate timelines for quicker value realization. Using the power of technology, we grow investments and improve valuation. Our team of senior technologists and business operators understand the importance of top-line growth and bottom-line efficiency.
Liberty Advisor Group is a goal-oriented, client-focused, and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists, and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. We collaborate, integrate, and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named as Great Place to Work, to the Best Places to Work in Chicago, and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.
