Dealmakers who fail to incorporate IT due diligence into their M&A strategy are taking a big risk, says OPT Solutions Founder and President Laura Pettit Rusick.
“I would encourage all dealmakers to have a plan for technology, which means you need to assess it,” Rusick says. “The IT due diligence process is not just about inventorying. It’s about really looking at technology and how you’re going to use it in the future and assessing whether you’re set up to do that. When you have the opportunity to go back on that deal structure and say, ‘Hey we found X, Y and Z, we’re going to have to put a lot of money into this,’ that’s the time to do it, not after the deal is done.”
Rusick works with middle-market companies on a variety of strategies, including IT due diligence related to dealmaking.
“There’s still a large portion of buyers that aren’t even aware that they should be doing IT due diligence,” Rusick says. “They haven’t even heard of it. One of the things that we find is that people tend to work with us after they’ve had a problem.”
In this Dealmakers feature, we spoke with Rusick about IT due diligence and why it’s a good idea to make it part of your M&A regimen.
Assess the risk
Dealmakers often ignore IT due diligence for the same reasons they skip past other types of due diligence.
“Some of it is pressure to close the deal,” Rusick says. “Some of it is they feel very comfortable. They like the organization and they like the management team. But just because you have good people on the management team doesn’t mean they understand the IT side of the business.”
Most companies conduct a thorough analysis of the financial and legal components of a transaction. What they often fail to grasp, however, is how much technology has embedded itself in the day-to-day operations of every company, no matter the industry.
“You have everything from licensing issues to old technology issues that need replacement,” Rusick says. “If those kinds of things aren’t taken into account in the deal structure, it’s going to be hard as heck to end up on the positive side of that equation as time goes on.”
In one instance, Rusick was evaluating an acquisition target for a client that had a phone system that was quite old.
“No one knew how old it was,” she says. “You think to yourself, ‘It'’ just a phone system.’ But those things can get pretty expensive, pretty quickly. In another situation, we were looking at an ERP for a manufacturing system that was multiple versions behind where it needed to be. We’ve found software running a business that is critical to that business that is not supported by the vendor. It’s adding risk to the equation. That risk should be evaluated, and the cost needs to be accounted for in the deal model.”
Consider your situation
In extreme cases, companies can spend more than $500,000 to remedy technology that is not where it needs to be in order to maximize the value of an acquisition.
“Is it that much all the time?” Rusick says. “No, of course not. But it’s more common than you think. The larger the organization, the more concern one should have.”
She says if you’re absorbing people onto your current systems and platforms, you may still want to do an assessment to make sure your current environment can support that.
“But in that case, you’re not bringing in somebody’s old laundry,” Rusick says. “It’s when you’re bringing systems and data with you in the deal that it becomes more potentially problematic.”
As a buyer, IT due diligence represents another area in which buyers need to adjust their perspective based on current trends.
“Companies have so much more dependence on technology than they used to that it has increased the risk in transactions due to the costs associated to support that technology,” Rusick says.