Due Diligence Check List – Part I – IT

By Generational Equity

04/02/2012

One of the most time consuming and critical steps in the sale of your company will be the due diligence process. If you are prepared in advance, the chances of you closing a deal with an optimal buyer go up dramatically. However, if you are unprepared and have difficulty responding to the various requests presented to you by the buyers, their confidence in you and your company will diminish, which could lead to them walking away.

The official definition of due diligence is:

The assessment of the benefits and the liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased. Due diligence occurs subsequent to the Letter of Intent (LOI).

Since it literally is the step where most deals tend to fall apart, we thought it might be helpful to write a series of articles on the due diligence process, creating a virtual checklist for you to use if you are forced to find a buyer without professional representation.

Based on our experience, one of the areas that buyers are really honing in on now during due diligence is the target’s information technology systems and procedures. Obviously in today’s environment, nearly every business, no matter what the industry, is now closely tied to the IT system they are using. Buyers more than ever want to ensure that post-acquisition, the IT systems are operating optimally and that the procedures are documented and followed.

How You’ll Know If Your IT Due Diligence Will Be Intense

According to a recent article in Mergers & Acquisitions, if any of the following features are true for your company, then you need to be prepared to provide full documentation of your IT systems during due diligence:

• Your company has a sophisticated web presence, especially if your web site is associated closely with your brand
• If you have developed any customized software that is critical to the effective operation of one or more segments of your business
• Your business has grown via the acquisition of other businesses and you now have multiple “legacy” systems operating independently throughout your company
• If the financial and managerial reports you generate are considered to be antiquated and not as robust as newer software that is available
• Your divisions have highly complex inter-company transactions that require consolidation or de-consolidation of financial reports
• If your company has multiple software systems that are required to interface with each other (sales to production to billing to receivables)
• Your buyers are interested in the business simply because of the technology you are using (i.e., your intellectual property)
• If you have recently reduced your IT budget in order to show more profitability (Buyers are very leery of reductions in IT spending just before an acquisition)
• Your IT system is antiquated and not updated or you are using software that has been replaced
• If your IT procedures are not well documented, for example, making it clear who is responsible for ensuring that you are using the latest software updates or the steps involved in the daily, weekly and monthly system backups

Again, if any of these scenarios are true of your company, you need to be proactive and take steps today to adequately prepare your IT system and staff for scrutiny.

At a minimum we have found it vital that your accounting system be able to produce a full range of financial statements quickly and accurately. Due diligence teams will typically spend significant time at your facility, asking for numerous pieces of financial information as they analyze your business. You need to be able to provide them with this data when requested. Delays or error-filled reports will not help them have confidence in acquiring your company.

In addition, we have found that it is vital to have systems and procedures fully documented BEFORE the due diligence IT team arrives. All too often we find ourselves working with business owners that have no idea if their IT staff has documented anything, much less the crucial things like system backups and software security.

Although there are many steps we will be discussing in this series on due diligence, from what we are hearing from buyers, IT is now one of the most critical. Again, take a look at the list above, and if any of these apply to you, spend some time documenting your IT processes before you sign a letter of intent to ensure that buyers will have confidence in your IT system.

Your Opportunity To Learn More

If you have found this discussion intriguing, and you are considering the eventual sale of your company, we invite you to attend one of our free, no-obligation M&A workshops. While there you will learn about how and when to exit your business (and how to do so with an optimal buyer). Due diligence will also be covered, and you will have the opportunity to have a private conversation with one of our M&A advisors about any concerns you have regarding your IT due diligence specifically and/or due diligence in general. 

In summary, if you are going to approach buyers on your own, be sure to be prepared for full due diligence. Do your own audit, especially of your IT systems and procedures to determine if your company will be able to stand up to the scrutiny of a buyer. You might be surprised what you learn if you take the time to do so.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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