How Technology Could Affect Your Valuation

By Generational Equity

01/30/2017

As we have highlighted in past articles, technology is taking an ever-greater role in M&A transactions. In fact, more and more buyers are actually expanding their IT due diligence questions dramatically to capture any issues that may be pending from a technological standpoint in advance.

Let’s face it, in today’s interconnected economy, no matter what industry you are in, technology now plays a huge role. Even if you are in a traditional industry, if your business has a website, you have technology issues that a buyer will need to ask you about.

Recently, our friends with Axial wrote a very interesting piece on this topic:

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?

If you are working with an experienced M&A advisor, they will delve into your use of technology and ask you key questions to help prepare you for what in many cases is 30-40 specific queries from buyers directly related to your technology processes. However, if you are in the market meeting with buyers without professional help, you need to spend time in advance of entering due diligence to make sure that your IT systems, procedures, and personnel are all adequate.

Fortunately, there are steps you can take, even if you are personally technologically adverse, to improve your technology’s value in the eyes of buyers. Here are a few:

• Clean up your technology household – “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.”
• Inventory your equipment and systems that you retain – “The inventory list also needs to show the purpose of the asset.”
• Make some drawings – “Create a few high-level drawings of the overall technical layout and architecture of the technology in the business.” These will come in very handy for the technical folks on your buyer’s due diligence team.
• Document your IT policies – And once you do, make sure that they are being followed!
• Create a technology org chart – Make it clear to buyers who your key folks are and explain their roles.

What makes this list useful is that even if you are not going to be talking to buyers for a long, long time, these steps will help you improve your IT systems and plug any holes you may not be aware of immediately. These gaps could be exposing your business to hackers, unscrupulous competitors, lost revenue, and/or unneeded expenses.

Even if you are a technophobe and the idea of doing these five things is extremely unappealing, taking action could be vital for your business operation. And ultimately, when you are in due diligence with a buyer and the 30-40 IT-related questions arise, you will be well prepared to answer them and give a buyer greater confidence in the company’s ongoing operations, assuming that you personally will no longer be involved in the operation of the company.

Due diligence is ultimately designed to do one thing: help your buyer become comfortable with the level of risk associated with your company. The more you can help the buyer have confidence that your IT system is secure, operating at maximum efficiency and policies are in place and being enforced, the lower the perceived risk will be, which will in turn improve the company’s valuation.

If you want to learn more about how improving technology will enhance your value, please email me at cdoerksen@generational.com or call me at 972-232-1125. If I can’t answer your question, I will put you in touch with someone with Generational Equity that can.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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