Due diligence is an exercise of care that a business is expected to take before entering into an agreement. As part of M&A process due diligence is traditionally focused on financial, legal, tax, commercial and operations.
More often technology becomes a topic of conversation in the boardrooms and across executive management. There is a strong drive to include IT as part of the overall due diligence scope of work. According to Deloitte’s 2019 M&A Trends report, acquisition of technology assets/capabilities is organization’s top strategic driver of M&A activity for around 15% of the organizations.
The sell-side preparation
It is often the case that target technology environment is complex and due-diligence process often does not permit sufficient time to understand value of the IT assets to the business. Hence, due diligence process may fall back focusing on red flags and remediation effort required. You would really want your technology platform to showcase its full potential and present the real business value it delivers.
Transactions typically require all parties to follow rigid protocols that emphasize control over the data exchange and clarifications. It can be difficult to assess a prospective technology for functionality, scalability, maintainability, reliability, risk, security, and other factors when given access to a target company’s management team.
CIOs and technology management teams play critical role in technology due-diligence. At the time of the technology due diligence you would want them to stand-up and unleash all the benefits and advancements. Preparing for technology due-diligence becomes critical for their success.
Sell-side preparation may not just reward potential buyer, but also equips seller to highlight intrinsic value of their technology environment.
Above all preparation might be a risk-free opportunity to understand organization own risks and weaknesses that are often exploited during deal negotiation process and may impact the price. The process may reveal areas of IT that raise red flags for potential buyers, such as (i) deferred technology debt, (ii) lack of maintenance, (iii) cyber risk, (iv) weak management practices and others.
Some of the early preparations may include:
- Identification of the team members or professional services firm knowledgeable about due diligence process
- Assembly of the team members knowledgeable of the environment
- Baseline and document current technology platform, organization structure, process and management practices using facts and language that neutrally represents environment
- Provide technical and financial risk-related insights to estimate financial and operational impact
- Finally it might be necessary for you to have necessary provisions in place to address top issues
Keeping up to date baseline information and estimates may also save your organization ton of time providing response for initial information request and follow-up clarifications.
Author providers additional material explaining importance of the Cyber due diligence that complements above and provides additional insight in what one may do during M&A process.