Preparing a business for acquisition? Financials often take center stage. Yet, beneath the surface, technology can quietly shape the outcome of the sale. For both Growth and Transition Advisors and business owners, understanding the role of technology readiness is essential for a smooth and successful transaction.
What IT Due Diligence Reveals
When a business enters the market, acquirers typically bring in IT due diligence specialists. Their mandate is to look beyond the numbers and assess the operational backbone of the organization. This process often uncovers issues that, while not always visible in day-to-day operations, can have a significant impact on deal value and post-transaction integration.
Common findings include:
- Disconnected systems across departments, resulting in siloed data and inefficient workflows.
- Key business processes that are undocumented, with knowledge concentrated among a few individuals.
- Legacy applications and manual processes that limit scalability and adaptability.
- Inconsistent data management practices, leading to unreliable reporting and decision-making.
- Security gaps, such as outdated software or insufficient access controls.
- Weak integration between customer-facing and internal systems, affecting service quality.
- Inadequate backup and disaster recovery measures, increasing operational risk.
- Limited access to real-time performance metrics due to fragmented systems.
- Over-reliance on specific team members for IT support, creating key-person risk.
- Absence of a technology roadmap, which can signal a lack of future readiness.
Impacts on Deal Value and Process
Technology gaps identified during due diligence can have far-reaching effects on both the value of the business and the overall transaction process. When buyers encounter technology-related risks, they often reassess their initial assumptions about the business’s scalability, reliability, and long-term potential. Ultimately, this results in:
- Lower valuation multiples, as buyers factor in the cost and risk of remediation.
- Extended negotiation timelines, with additional scrutiny on technology-related risks.
- Increased post-acquisition integration costs, as buyers plan for upgrades and system alignment.
- Delayed closings, as remediation plans are developed and negotiated.
- Higher escrow or holdback requirements to protect against unforeseen technology issues.
- Reduced buyer confidence, which may limit the pool of interested acquirers.
- Potential for less favorable deal terms, such as earn-outs tied to future technology improvements.
- Reputational risk if the business is perceived as technologically outdated.
The Remedy: A Business-First Approach to Technology
Addressing technology readiness early in the transition process can help mitigate these risks. A business-first approach—one that aligns technology strategy with operational goals—enables organizations to:
- Streamline and automate key processes, reducing manual effort and error.
- Integrate systems to improve data flow and collaboration across teams.
- Document critical workflows, supporting business continuity and knowledge transfer.
- Strengthen data management and security practices.
- Develop a clear technology roadmap that supports future growth and scalability.
Remember: Maximize Value, Minimize Risk
Technology is more than a support function; it is a multiplier of business value. By prioritizing technology readiness, advisors and business owners can help ensure that transitions are efficient, negotiations are smoother, and outcomes are maximized for all parties involved.
For those considering a business transition, evaluating technology as part of the broader value enhancement strategy is not just a nice-to-have; it’s essential. And at 13X, we can help!