What to Know About IT Due Diligence

When you have a business of nearly any kind, your information technology (IT), is a critical component. Even for small businesses, their IT systems are essential to their daily operations, and for many companies, IT capital represents one of the biggest investments and expenses.

When a company is considering selling or being part of a merger, the potential buyer or investor is likely going to want to look carefully at their IT systems, which is often called IT due diligence.

Dealroom provider Firmex provided an overview of the deal-making market, highlighting the strength of mid-market deal volume in their M&A report, meaning it could be an important time for smaller and mid-sized firms to start thinking about things such as their IT systems and IT-related due diligence.

Below are some things both buyers and sellers should know about IT due diligence.

Consider Integration
If you’re targeting a business for a merger or acquisition, it’s important not just to look at the quality of capabilities of IT systems, but to look at integration capabilities.

During a merger, if IT systems aren’t compatible with one another it can prove disastrous for the entire process.

Even when the merger or acquisition isn’t happening between technology-based companies, if the IT systems such as the CRM system used by one company isn’t compatible with the other, it’s going to require more investment of time and money to keep things moving along smoothly.

There needs to be consideration not just for integration possibilities, but also the costs of such integration.

If there is to be a merger or buyout of a small company, there is a very likely possibility that proper licensing hasn’t been taken care of.

If this is the case, the investor or buying company may have to invest for proper licenses, and this can be a particularly significant issue at the small and mid-sized market level.

An audit of IT systems during due diligence should look at not only integration and the potential for licensing costs, but also at scalability.

Are the systems in place going to be able to handle more customers? Are the IT systems primarily cloud-based with simple solutions for expansion, or will it require a significant investment of hardware or servers?

These are all costs to factor into the total of the transaction.

IT due diligence isn’t just about the technology. It’s also about the people behind the technology. Before a merger or acquisition, there should be attention placed on the people responsible for IT.

There need to be in-person interviews to see how well the IT-based human capital will transition to the new organization.

Will key employees need to be retained? If so, what will be the investment of time and money required to keep them?

As a final note, good IT due diligence should also look at potential places where money could be saved.

IT due diligence is an essential element of comprehensive M&A research, but also one of the most overlooked, with the majority of the focus typically going to legal and financial considerations. Taking into account IT systems can make for a better overall transition in a merger or acquisition scenario.

About Author