Information technology due diligence can prevent unexpected—and painful—IT expenditures after the acquisition.
I recently spoke with a business owner who had just acquired a new company. After months of due diligence, financial analysis and negotiation, the sale was finalized. Then, a few weeks later, he incurred an unexpected bill for $10,000 for costs associated with an IT upgrade/repair. How can you avoid such a costly surprise?
Don’t Get Caught Off-Guard
Acquiring a business is challenging enough without being surprised by unexpected capital expenditures after the deal has been inked. When buying a business, your primary focus should be on defining strategic goals and integrating new management, services, product lines, corporate cultures and processes. You shouldn’t have to spend time reacting to technology emergencies. Not only can this cost you financially, but can force staff to change the way they work, causing employee anxiety, frustration and distrust of new management.
When buying a business, what considerations should you give to the IT systems that support business operations? How will due diligence of the company’s information technology systems help pave the way for the a successful acquisition and integration? Below are a few of the aspects you should evaluate.
Review the Company’s Data Backup & Business Continuity Plan
Start the IT due diligence process by verifying that the company has a recent valid backup of all data along with a documented backup and recovery process, and ensure that the backup is being stored securely. This will help protect intellectual property, customer and prospect data, process documentation, financials, and other valuable data if there is a system failure or other glitch during the data integration process. The back-up procedure will also give you insight into the “return to operations” time. While this is a tactical consideration, if the company has not mastered this basic operational best practice it could be a tell-tale indicator of other operational discrepancies.
Next, review the acquisition candidate’s business continuity plan (BCP). The BCP should be current and comprehensive. It should outline critical business processes that must remain operational in an emergency situation so your business can continue to:
• Serve customers without interruption
• Generate revenue
• Deliver goods & services
• Invoice clients & collecting payments
• Pay vendors & employees
The BCP should also contain:
• Procedures required to maintain business processes during an emergency
• An inventory of the company’s information system assets (computers, servers, routers, switches, software, telephone system, ISPs, vendors and more)
• Documentation of the logical data flow, that is, how the IT systems are designed and connected
With this information a trained engineer should be able to quickly identify and assess the risk within the network, such as single points of failure, sub-par products and architectural deficits. It will also help you identify whether infrastructure upgrades will be necessary to support new loads placed on the system when applications, offices, end-users and mobile workforces are integrated.
Careful analysis of the BCP can alert you to costs that might need to be incurred before or after the acquisition. If the company doesn’t have a BCP in place, consider it a red flag.
Determine If Hardware is Still Under Manufacturers’ Warranty
Another critical component of the BCP is a recent listing of all of your systems and their warranty status. If hardware and systems (servers, desktop PCs, laptops, phones and phone systems, routers, etc.) are not under warranty, get a quote from the manufacturers for what it will take to purchase warranties. Based on how critical each piece is to maintaining business operations; consider investing in same-day or next-day on-site service for the number of years you plan to continue using each system.
If the systems don’t have warranties and the manufacturers don’t offer them, your business faces potential costly upgrades and risk of losing critical data. Depending on which system(s) eventually fail, your business could be interrupted for days or weeks as you research and purchase replacement systems, reinstall LOB applications and software, recover data, rebuild databases and find workarounds so your business can remain operational while the systems are being repaired or replaced. The costs associated with recovery can be staggering.
Identify the Status of the Company’s Line-of-Business Application
It is critical to understand the status of the acquisition candidate’s line of business (LOB) application; that is, the CRM or ERP on which the company’s business runs. Recent industry developments have eliminated the upgrade path for many older hardware and software products, which means that you might incur significant costs to maintain, upgrade or replace these systems down the road.
Start by asking whether the LOB application is off-the-shelf or custom-built:
• If it’s off-the-shelf: Is the vendor still in business? Is the version the company is running the most recent? If not, is this version still supported by the manufacturer? If it’s not supported, what will it cost to migrate to most recent version?
• If it’s custom-built: Is the company that built the software still in business? Does the company you’re looking into buying own the software and code and, if so, is the complete code in the IT staff’s hands? What are the support and maintenance contract terms?
A thorough analysis of the LOB application will help you more accurately estimate the investment you might need to make in critical software and associated business processes post-acquisition.
Determine If IT Staffing Changes Will Be Necessary
Often, IT staff in the company being acquired don’t have the required professional certifications or experience to bring value to the new company. Carefully review each staff member’s certifications and training. Have an outside IT manager review each person’s resume and give you an objective assessment of whether he or she would hire the person. Determine whether you will need to invest in certifications for existing staff or if you’ll need to hire new staff to bring your IT department up to par.
The Bottom Line
Based on the analysis of the company’s financials, IT systems and LOB applications, categorize all recent, short-term and long-term expenditures as:
• New investments (new IT projects, hardware, software, services, staff)
• Replacement of old equipment (operations costs)
• Break-fix or repair and maintenance (reactionary support of current systems)
Why is this important? Because not all money spent in IT delivers equal value to your business.
For example, in 2008, industry analysts at Gartner (www.gartner.com) reported that in most companies only 20% of IT spend was allocated to strategic enhancements, while 80% was earmarked to support basic IT operations. That means that only $2 of every $10 a company spent on technology went to improving the business’ competitive position. The report went on to say that companies that don’t convert this to a 70% strategic spend would find themselves unable to compete in the marketplace. Identify where the company you’re acquiring spend its money on IT and determine what opportunities—and risks— this presents to you, the buyer.
The decision to acquire a business will most likely not hinge on the status of the acquisition candidate’s IT systems. Businesses don’t make money from IT, but IT can be a significant cost to your business if not managed properly. Therefore, critical analysis of the IT status of the company you’re acquiring can have a very real impact on valuation. This is why due diligence of IT systems, staff and resources is a must.
To search the archive of Perspectives articles, go to the Search page