The value of technology due diligence in private equity

Posted on Jun 2017

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It is easy to understand the requirement for technology due diligence where a target company is a technology company. But it is equally important to emphasise the significance of conducting technology due diligence where the target company’s technology operations are predominantly internal-facing. We’ve undertaken more than 400 such technology due diligence engagements and there are some common themes that we see, any of which could affect valuation and/or the 100-day plan.

  • The core business system (e.g. ERP or CRM) is either sub-optimal, not scalable or generally not fit for purpose. It may need to be replaced.
  • There is a lack of awareness of disruptive technologies (e.g. IoT) and how to embrace them.
  • Cyber security arrangements are weak (at worst non-existent).
  • The IT team does not have the experience that will be required to enable the growth agenda. It may also be poorly aligned with the business. The roadmap and budgets to scale or professionalise have not been thought through.
  • The quality of essential third party services (to the target) is poor and often provided on inflated terms.
  • Lip service is paid to data management responsibilities and disaster recovery arrangements.
  • There is an opportunity to introduce new ways of thinking (e.g. CRM, IaaS, digital) that could materially improve the customer relationship, speed to market, reduce costs of service delivery etc.
  • Duplication of data and systems complicates the provision of timely, credible management reports.

Intuitus will report on all of these areas as standard and within the context of the investment thesis. We do so by deploying C-level expertise with many years’ experience working in the sector of the target business. This enables an incisiveness of assessment and clear, pragmatic guidance where improvement is needed.

We also consider the maturity of the business, where both the risks and the opportunities for improvement will vary to a large extent. There is a particularly strong case for undertaking technology due diligence where the target has been a family or entrepreneurially run business, typified by a lack of investment and technology experience. In these situations, our focus is more on what needs to be done (and for how much) rather than what already exists. Such companies will need to embrace change and expert-based technology due diligence can provide significant value in setting out the rationale and roadmap for change, the required investment and the skills that will be needed to make it happen. As a by-product, Intuitus helps both the investor and the management team to visualise the process.

We know from first-hand experience that some investors have traditionally chosen not to commission technology due diligence. However, it is an undeniable truth that, given the ubiquity and impact of internal-facing technology systems, it is almost always the case that they make a material contribution to the value of the business. A well-executed, suitably tailored technology due diligence engagement will provide the investor with expert insight into how that value can be enhanced.

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