Technical Due Diligence 101: Three Good Reasons PE Firms Need Pre-Deal Data

In the spirit of the Halloween season, here’s a scary story:

A private equity company decided to sell off one of its investments, anticipating a lucrative deal. The company followed all of its own best practices in readying the investment for the sale, and found an interested buyer.

But then, on what we assume was a dark and stormy night, the potential acquirer performed a separate type of due diligence – technical due diligence – which revealed some truly frightening things: hidden problems in the technology that the seller wasn’t even aware of. The acquirer backed out of the deal, costing the PE firm millions.

The scariest part of this story is it’s actually true – failure to perform technical due diligence has influenced many a deal for both buyers and sellers, which makes it critical for PE firms interested in investing in a company to take a pre-deal deep dive into all of its technical assets and processes.

While technical due diligence can be an arduous process, there are three good reasons to do it:

1 – You have greater control over the final numbers when you have all the information. Technical due diligence allows you to get an idea of the IT risks across the entire value chain, which can then influence the purchase price.

A PE firm will allocate a certain dollar amount for investment to generate the desired results – but, depending on what technical due diligence reveals, that might not be enough. Technical due diligence prior to closing means you can alter projections and renegotiate the price; after the deal is locked in, your freedom to change any part of it is limited.

2 –You ascertain how effective the executive team will be. A good technical due diligence process will reveal how well you’re setting up the executive team to influence future success, and the technology environments or setups in which they will have to work.

Your prospective CMO might have the skills to meet business goals, but if the data they need to support their initiatives is scattered into disparate systems that don’t talk to each other, or if the master data is flawed, they’re not set up for success. Knowing these factors pre-deal allows a firm to lay the right technology groundwork for the executive team to drive results, or shift goals to accommodate any roadblocks.

3 – You determine where any IT flaws lie. Firms know to investigate an investment’s business-facing IT features, like disaster recovery time and data center uptime and downtime, but they don’t necessarily look at the physical infrastructure supporting various business or customer applications.

If the operating company’s eventual goal for an application is to add 20 percent more users, but it discovers the server will only operate at one-third the speed in that case, the firm will have a problem on their hands that is less easily (and less cost-effectively) solved later in the game.

Technical due diligence is the key to ensuring technology is never the bottleneck in achieving investment goals. Set yourself up for the greatest chance of success and maximum return by using a trusted, unbiased third party to investigate every nook and cranny of a new investment’s IT – and the earlier technical due diligence is initiated, the more valuable the findings are, because of how much more actionable they will be.

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