When a private equity firm acquires another company, it must conduct IT due diligence. Is the company’s IT secure? Is it efficient? What weaknesses are there, and must they be addressed immediately? This type of investigation gives the PE firm information it needs to make a reasonable bid. It also helps it build financial models to understand how much it stands to gain from its investment over the next three to five years.

Technology provides the backbone for operational efficiencies and, if not set up or managed correctly, can hinder sales and lower a company’s worth. Beginning an IT due-diligence inquiry means first understanding the players — from the C-suite to finance to high-level managers — and gathering information on all IT-related hardware, software, and related contracts. For example, some software vendors might try to void licenses because a company is being bought. Whether it’s tens or hundreds of applications, it is important to know whether licenses will need to be renegotiated. All contracts, such as printer servicing or Internet service-provider contracts, also must be reviewed.

Good IT security obviously is important for any business. Some companies don’t meet the industry standards, however, and it’s important for purchasing entities to understand what it will take to get a company to an acceptable level of security. Buying a house is a good analogy. If an inspection shows that the roof needs to be replaced, purchasers have options. They can buy the house as is; they can ask for money off the price to fix it; or they can walk away from the deal.

Management advisory firms work with PE firms on their IT due diligence, assessing the full scale of the acquisition’s IT operations. Their team looks at everything and anything that has to do with technology: applications, IT budget, data, hardware, software, number of users, architecture, IT security, branch locations, corporate setup, current IT contracts, staff, leadership, training, change management, communications, and more. They typically spend time onsite and at branch locations to get a sense of how the company works.

The advisors then report key findings to tell the PE firm what they found. This includes IT costs associated with acquiring the new company, such as salaries for new hires, as well as timelines for completion and immediate next steps. With this information, PE firms can make better, more-informed decisions.

Creating Value through Tech in Private Equity Deals

As private equity deals become more common in business, and the amount of expected returns for clients becomes larger, firms leading these transactions need to be aware of the details that can cause returns to beat or miss expectations. Whether you are leading a leveraged buyout, a merger, or a carve-out, you need to focus on CapEx and OpEx just as you would focus on profit. The plan sounds simple, but it can be tricky to identify all hidden costs across the lifetime of an investment. Most management advisory firms know where to look, how to identify these costs, and – most importantly – how to turn them into opportunities.

Knowing Where to Start in IT – Diligence

By fully understanding the scope and circumstances of a transaction, consulting companies with a team of IT-industry experts can evaluate your deal, look at your short-term plans, help build your operational goals, and confirm your financial targets to properly evaluate IT costs. Performing a thorough IT-diligence review of all companies involved allows them to show you where your money is being spent today, including areas of concern and potential duplicate costs. You must understand the landscape of costs, assets, contracts, liabilities, and teams in order to successfully build a new operating model. Beginning an IT due-diligence inquiry means first understanding the players — from the C-suite to finance to high-level managers — and gathering information on all IT-related assets.

Tear It Down, Build It Up – Creating the New IT

As you combine assets, look for new leadership, and narrow focus on your customer base, you also must build your new future state of IT. Technology provides the backbone for operational efficiencies and, if not managed properly, can hinder sales and lower a company’s value. New tools must be procured, applications must be set up and managed, contracts need to be evaluated and reviewed, configuration decisions must be made, and the “build-vs.-buy” and “keep-vs.-retire” discussions must be held. Your new entity will rely on these systems, applications, and security to increase sales and give customers peace of mind. Outside consultants take ownership of all these tasks, from application assessments to implementation to post-go-live management, and treats your environment as if it were their own.

The Full Separation and Handoff – A New Day One

The first day removed from a transition-services agreement can be intimidating, but with the right help, your new head of IT will have a reliable network, secured data, fully functioning front- and back-office systems, and insight into all business functions thanks to IT. Having thoroughly scoped out, tested, prepared, and transitioned your business and IT, your new day one will be smooth for you, your employees, and your customers.

Summary – Let IT Help Your Transaction

Deals are set up to be messy, with many moving pieces and workstreams. From diligence to creating a new IT environment, our IT practice specializes in setting up all new technologies within a company. With TSA penalties ranging in the 10-15-20% range for going over your deadlines, it’s important to have a well-organized team ready to separate before that deal runs out. With the right diligence, insight, planning, and organization, IT can help you achieve your deal returns instead of being a cost burden.

By Chris Kalna

Want more information?