When a private equity (PE) or strategic investor is considering a potential technology acquisition, the technology due diligence process is key to ensuring a successful investment. A Tech DD provides a comprehensive analysis of the target’s technology infrastructure, architecture, organization, operations, and capabilities. At the same time, it should not be about a go/no-go decision.
After completing a technology due diligence exercise, and looking past the red flags, it is also important to provide information on value creation initiatives and how they can be realized by the investor. After all, once you’ve established that the company is a worthwhile investment, you want to know what to do with it for maximum value!
Tech Diligence Matters
In order to maximize the investor’s return on their investment, they must be able to quickly and effectively utilize the findings of the technology due diligence exercise. To do this, the investor must have a plan in place to implement the value creation initiatives identified in the due diligence. This plan should consider the pre-closing period, the first 100 days after the acquisition, and any longer-term value creation considerations.
A good tech due diligence report outlines a stack-ranked list of high-level value creation activities that are deeply in accordance with the posed investment thesis. The set of activities must focus on the shortest way to success i.e., fulfillment of the thesis. This includes potential risk mitigation activities as well as listing opportunities for opening new value creation avenues. This exercise will generally help the investor to assess the risks associated with the technology, identify potential value creation initiatives, and come up with a plan to capitalize on the strengths of the company.
A great technical due diligence has each activity including a set of associated costs - be those additional headcount requirements or out-of-pocket expenses or both. To make it really helpful, though, the outline of activities and costs should allow for the investor to navigate different phases of an acquisition process - the pre-SPA, 100 days, and longer-term activities (e.g., consolidating the business plan and incorporating EBITDA adjustment strategies).
Tech DD Report - How to Use in Shares Purchase Agreement
Before signing a shares purchase agreement (SPA), the investor should consider the headcount and monetary requirements for each value creation initiative. For example, risk mitigation-oriented cost items could be leveraged during price negotiations. Having a constructive base to negotiate and discuss ensures a successful premise when settling on the final ticket price.
Having information on additional investments post-acquisition also allows the investor to create a realistic business plan thus creating a more accurate view of the possible return on investment. Any inconsistencies can then be adjusted for in the purchase price or by revising the investment thesis.
Similarly, the investor may also choose to incorporate the additional headcount and expenses into the SPA (e.g., as part of indemnities), or utilize the findings in an earnout plan.
Technical Due Diligence and the 100-Day Plan
Once the SPA is signed and the acquisition is complete, the investor should take action to quickly and effectively implement the value creation initiatives identified. During the first 100 days after the acquisition, the investor should prioritize the initiatives and focus on those that will have the most immediate impact. This may include initiatives that will reduce costs, improve operational efficiency, or introduce new products or services.
Managing Long-Term Plans
The first 100 days is also the time to create a strategy for utilizing the new resources long term. In particular, the investor should consider the remaining long-running activities, or technology practices’ revisions outlined during the tech diligence. This may include initiatives that require additional headcount or capital investments on a continuous basis to realize the full benefits of the value creation initiatives. The investor should consider how these initiatives fit into their overall business plan, and determine the best course of action to realize the desired results.
Having a realistic business plan with adequate EBITDA and revenue projections that are in accordance with the targeted return on investment will be a great input for anchoring long-term initiatives. Having a great IT due diligence report at the onset just frontloads this exercise and allows for smooth execution throughout.
Final Thoughts
By utilizing the findings of the technology due diligence exercise, the private equity or strategic investor should be able to quickly assess and eventually maximize their return on investment. By having the ability to creatively consider the additional headcount and expenses required to realize the value creation initiatives, the investor can ensure that they are structured in the SPA, earnout plans, and business plan to maximize value. Having a clear and concise technical DD input, the investor can take action quickly and effectively to implement value creation initiatives during the first 100 days after the acquisition. Finally, by managing the longer-term considerations, the investor can ensure a sound investment all around.
We at Intium feel proud that we can stand by all the values mentioned in this post. Our extensive practice and countless interviews and feedback sessions with clients/investors have helped us to intimately understand issues faced on a daily basis. By painting a concise and constructive picture for our clients, we’ve helped shave off hundreds of person-hours of work for our clients when constructing a business plan and evaluating return on investment.
Technology is a complex topic and can feel daunting when put into an investment context. We at Intium believe that we’ve made it a lot easier to comprehend and utilize when tailoring an investment.
Would you like to understand more specifically about how we achieve the above and more?