Tag Archives: Axial Forum

General IT, Small Business Purchase, Technical Debt

5 Simple Ways to Boost Technology Value Before Sale

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This article first published at the Axial Forum here: 5 Simple Ways to Boost Technology Value Before Sale and is reposted here with permission.

During M&A, seemingly small technology concerns can have material impacts on the ultimate valuation of your business. When selling your business, how can you improve your technology’s value and speed up the due diligence process?

Here are 5 simple tips.

(Note that these tips don’t address more significant technology issues like embedded technical debt, un-found software defects, or key security risks. Those types of issues need to be discussed and evaluated separately.)

1. Clean the garage

Ask any realtor: a clean and orderly house is easier to sell and will do so at a higher price than one that is disorganized or in disrepair.

Every company accumulates old technology that is no longer needed or used. Clean it up. Take a Friday, buy pizza and sodas for the technology teams, and have a spruce up day.

Sell or dispose of old printers, laptops, phones, computers, or servers that are no longer being used. Get rid of the accumulated boxes, old manuals, broken mice, computer monitors that only show green, and outdated cables and connectors.

Eliminate everything but what you know you have definite need and direct use for. Resist, with great aggression, the notion that “this may have value someday.” It won’t, especially not for your business’ new owners.

2. Take inventory of the technical assets

Know what you have and what the new owner will be taking over. You should already have an inventory of your technical assets, but if you don’t, create one now. This can be as simple as a Word or Google Doc, or an Excel spreadsheet that lists servers, software systems, infrastructure elements, employee devices, etc.

The inventory list also needs to show the purpose of the asset. If the server called “acmeacct” is the host server for the corporate accounting database then say that. If you have a Cisco router that interfaces with the WAN circuit to the remote office in Columbus, OH, then put that as the purpose. I recommend having hardware and key software systems listed on the inventory sheet.

An up-to-date inventory list will speed the work of the technical due diligence and improve the perception of the acquiring team.

3. Draw pictures

They say a picture is worth a thousand words. If you don’t already have them, create a few high-level drawings of the overall technical layout and architecture of the technology in the business. Those drawings will communicate, far better than any other medium, the technical relationships and dependencies for your acquiring team. Include the names of the assets, physical locations, and other pertinent high-level details on the drawings. Be sure and use the same names on your drawings as you do in your inventory lists.

The drawings don’t have to be professional CAD drawings. Simple PowerPoint block diagrams or even hand drawn pictures, as long as they are legible and accurate, will suffice for most businesses.

4. Police your policies

The state of your technology policies and procedures will communicate volumes about your operational condition to the acquiring team. Clearly written, accessible, and organized policies increase compliance and will improve the buyer’s perception of the value and capability of your organization. Password and security policies, backup policies, and software deployment procedures should all be documented. Especially if your business engages in regular credit transactions, the lack of security will increase perceived risk in the minds of the acquiring M&A team.

Before due diligence starts, review and update any policies or procedures that are out of date. Document missing procedures and communicate them to the organization.

Organize the policies and procedures and title them appropriately in a common place – this could be a shared folder on a company server, a list of Google documents, or a defined location on the corporate intranet. Every employee should know where these live and how they are accessed.

5. Rectify the roles and responsibilities

Acquirers will view your company’s employee base as a key asset during M&A. Certainly any good HR department will have a list of employees and job titles. But that list does not communicate responsibility or system expertise from a technical perspective.

The technology teams should have their own roles and responsibilities list that communicates what each team member is responsible for and expert in. When possible, the list should include the names of systems used in the other documents to facilitate better overall understanding by the acquiring entity.

General IT, Technical Debt, Uncategorized

7 Areas of Hidden Technical Debt That Increase M&A Costs

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This article first published at the Axial Forum here: 7 Areas of Hidden Technical Debt That Increase M&A Costs and is reposted here with permission.

Effective buy-side deal teams are well-versed at issues during due diligence that might impact a deal. But even the most astute deal teams can miss te­­chnical and IT aspects of the target company that can significantly impact the cost of the integration and the return on the investment.

Here are seven often overlooked areas of potential hidden technical debt that acquirers should investigate prior to close.

Employee Devices

Desktops, laptops, mobile phones, and tablets are the tools of the modern office worker. In most businesses each employee has at least one of these and in many cases 2 or 3.

The acquiring business will assume responsibility for the condition and upgrade/replacement policies for these devices. Even in a small company acquisition, there can be hundreds of devices to track, maintain, update, replace, or discontinue. A well-run business should have an inventory of employee devices.

During due diligence use this inventory to determine if excessive technical debt exists in the device fleet. If the business does not have a device inventory, further due diligence investigation will be needed to determine hidden costs.

Backend Server Hardware

Most businesses still use physical servers. These could exist in a rented data center or be stacked up in the closet down the hall.

As an acquirer, you need an accurate list of these assets and the purpose they serve. The actual server hardware needs to be checked for age, serviceability life, warranty, general condition and need. A server upgrade can be a non-trivial task, especially on a mission critical application. Factor in the costs of migration, updates, and maintenance of these physical assets in due diligence planning.

Server Operating System Patches and updates

In addition to physical hardware inventory, the operating systems of the servers need to be checked. Operating system vendors like Microsoft, Apple, or Linux issue updates to correct software defects and security vulnerabilities. It is up to the system administrators to keep up with the installation of patches and updates. Systems that have not been patched are more vulnerable to penetration and disruption.

Spend time during due diligence inventorying the operating systems’ patch level and the security vulnerabilities of the servers. Then plan for additional time and effort post-integration to mitigate.

Unsupported/Obsolete Software Applications

Some businesses rely on older software applications, sometimes custom-built. Old or obsolete software is a significant cost factor when planning mergers of technical assets.

During due diligence, inventory all software in use by the business. Licenses, support contracts, warranties, and necessary upgrades also should be documented. Software applications that are no longer supported by the vendor or creator need to be factored into the cost of the merger. Knowing the landscape of the business software and planning for changes during due diligence can save significant amounts of time and money during the execution phase.

Paper Dependent Processes

Many businesses still use paper. Make sure you understand which processes are dependent on paper, how its stored, whether it needs to be converted to electronic format and the like.

Paper can generate storage, security, and accessibility issues for the acquiring business.

Integrating paper processes with electronic processes of the acquiring business can add time, expense, and potential errors, as well as require additional equipment. Investigate this liability up front to appropriately plan for it during integration.

Duplication of Data

Almost all businesses have databases to hold corporate, product, or customer data. Careful examination of the database architecture yields important facts regarding duplicate data that will impact future integrations.  Duplicate data leads to misreporting, inefficiencies, and security risks. It’s not a deal-killer but does need to be examined and understood to determine its ongoing need, security risk, and cost impact to the merger.

Custom Software

Custom software can be a competitive advantage, and help make a target attractive. However, custom software can also hide all kinds of scary things. On the outside things may look shiny and new, but on the inside there may be loads of technical debt.

During due diligence, consider the software’s architecture, dependencies, and implementation. Look at the quality of the code and what tools and languages were used. All these factors impact the cost of the business and its ability to grow and integrate in the future.

General IT, Small Business Purchase, Teams

Why You Need an IT Professional on Your M&A Deal Team

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This article first published at the Axial Forum here: Why you need an IT professional on your M&A deal team and is reposted here with permission.

Traditional M&A deal teams run the risk of missing substantive issues that could impact deal structure, terms, and integration success.

Where does this risk come from?

Often the answer is simple: a lack of informational technology (IT) visibility.

Most M&A deal teams comprise accountants, lawyers, M&A professionals, and executives. These are the small teams that engage and form the deal framework with a target firm.

This small team approach can work well and move quickly. But business today is increasingly IT dependent, and these teams may overlook crucial items that could make or break a deal.

How can M&A deal teams mitigate this risk? Involve IT professionals as part of the deal team to help assess a broad overview of the IT landscape of the target firm and identify any substantive issues that may exist early in the deal making process.

This may seem crazy to some. Traditionally, IT is viewed a functional unit of a business — far down the food chain when it comes to M&A deal making. Information technology is not considered at the beginning of the process unless the acquisition is IT-related.

However, here are six reasons that an IT representative should be involved in your next deal team.

1. Pervasiveness

Even small market firms have a significant IT footprint these days. Every department in a typical business has dedicated information technology systems to handle their day to day business functions. There is marketing automation, accounting, resource planning, point of sale systems, human resource systems, production management systems, customer relationship management software, database management systems and big data analytics software, to name just a few examples.

These are the simple cases. Entire departments can be completely dependent on IT systems to fulfill their duty to both internal and external customers. We are almost numb to the pervasiveness of IT. Like electricity, as long as it works, we don’t take much notice.

This out-of-sight out-of-mind attitude can blind an acquirer to potential deal trouble spots. Since IT impacts each business area, it’s important to identify major obstacles and issues early in the deal process.

2. Complexity 

As the pervasiveness of IT systems increases, so does their complexity. Servers, databases, networks, cloud storage, security firewalls, authentication and security systems, third party APIs, and open source software stacks are the hidden components of visible business technologies. It is here, in the maze of hidden components, that potential problems lurk during deal formation.

As a business scales, the number and interconnectedness of these systems increases. It is easy to conceptualize a corporate web server. However, that simple concept can have a complex implementation. For example, it could be that the corporate web server is really several cloud virtual machines behind a load balancer using shared common storage and front end proxy caches for static element distribution and a content delivery network for serving corporate media. (And this is just a small piece of the potential IT complexity in a small to mid-size corporate acquisition.)

Getting a bird’s eye view of the complexity of the IT situation can help deal makers better understand the impact on price, terms, and deal structure as well as improve integration planning.

3. Business Impact 

If a target firm is desirable to an acquirer from a financial or operational perspective, chances are its IT systems will have a direct impact on the business. Effective IT systems can bring significant competitive advantage to a company through automation, proprietary function, scale, and features. The acquirer needs to make sure that they can realize and potential improve upon these advantages after the acquisition. Having a high-level view of the business impacts of the existing IT systems can give the deal team unique insight into ways to further leverage those capabilities post transaction, thus improving potential ROI of the acquisition.

4. Cost

According to Bain Capital’s Will Poindexter and Vishy Padmanabhan, the single biggest impact on general and administrative costs for many companies is IT. Deal teams should consider early on the condition and strategy necessary for the target business’s IT functions. The current condition of IT will have a big impact on future cost trajectory. Poindexter and Padmanabhan use three archetypes — “Neglected,” “Indebted,” or “Gold Plated” — to describe, at a broad level, the conditions they have found in their engagements.

Each archetype will have its own impact on future costs and investments needed post transaction. Much like a high level financial assessment is done to justify pursuing a deal, a high level IT assessment should be done up front as part of the early engagements. Hidden costs, true condition and implicit assumptions regarding the financial needs of the target firm’s IT structure should be revealed and known to the deal team.

5. Security Liability  

Not a day goes by that there is not some news story about a hacked company website or stolen corporate database of customer information. The impact of a data breach can be expensive at least and debilitating at worst. According to the IBM’s 2015 Cost of Data Breach Study, the average consolidated total cost of a data breach is $3.8 million.

Because of this potential liability, an acquiring firm absolutely needs to fully evaluate the security capabilities and practices of a target business during due diligence. However, certain key elements of a business’s security architecture, policies, and practices should be discussed and reviewed during early deal discussion. Having this information early will give the deal team an indication of how the firm approaches security. Knowing this will facilitate a more accurate assessment of potential risk and immediate mitigating actions needed post-transaction.

6. Expectation Management

Integrating IT systems can be the largest part of a merger or acquisition. Differing systems, tools, protocols, and implementation architectures or tools can complicate integrations significantly, impacting timelines and ROI. If some of the thornier issues of a potential IT integration are known at a broad level during deal formation, it’s easier to create more realistic timelines for closing and merging. This knowledge can also help the deal team more appropriately staff the integration teams needed to complete the merger or acquisition.

Summary

An engagement with IT during the deal phase can help identify red flag areas that will need extra due diligence or that can impact deal structure and negotiations. Knowledge of the IT situation by the acquiring firm can also provide leverage points during negotiations and enable the acquirer to factor in early impacts from IT risks, costs, or additional investments that may be needed. Ultimately, knowing, considering, and planning to mitigate IT related factors and issues early will contribute to a more successful M&A outcome.