Why Technology Diligence Matters

Earlier this year I published a post regarding technology diligence, and this post provides some specifics as to why it matters based on over 50 technology diligence engagements Sabio has performed for our private equity (PE) clients. After spending some time analyzing those diligence engagements, several empirical patterns have clearly emerged. Because technology diligence is becoming an increasingly important factor in the investment decisioning process within the middle-market, we feel that all parties involved in the process – PE firms, investment bankers, and especially companies seeking investment – can benefit from an understanding of what we typically encounter. The following are a few of our more common findings, grouped by category, for middle-market companies seeking PE investment; we have found that:

PE Investment Process

most are not well-prepared for the technology diligence process
almost all lack expertise with integration planning and execution (in the case of bolt-ons to an existing portfolio company)
almost all do not have a full appreciation of the data/reporting requirements that PE will impose post-close, especially related to financial data

Technology Strategy

almost all do not have a strategic technology plan aligned to business goals
many lack technology leadership, while some outsource all technology resources with no technology resources on staff

Technology Operations

all have more software applications than even they realize (50-200% greater than what is self-identified)
almost all do not address cybersecurity, disaster recovery, and business continuity to an appropriate level
roughly half have been slow to embrace the cloud
most have minimal internal documentation, including those that produce and sell commercial technology
most tend to use small business finance software for far too long

For companies considering PE investment, prior preparation from a technology perspective is important for four primary reasons:

PE is increasingly incorporating technology diligence into their standard pre-close diligence process
Investment banking firms often encourage their clients to undergo “pre-diligence” on their financials / legal structure and have started to include technology as part of this process
Significant technology-related “red flags” can negatively impact company valuation or, in a few rare cases, prevent a deal from closing
For companies that produce commercial technology products/services, the means by which the products/services are developed, maintained, and supported can have a significant impact on overall company valuation

#sabiotech