M&A and technology integration: Value creation starts during due diligence

A proactive, deliberate approach to technology is valuable for investors and portfolio companies of all sizes, but especially important for lower-middle- and middle-market enterprises with limited corporate-level resources. In scenarios where a lean back-office is an inevitable reality, a thoughtful technology integration gameplan can make the difference between achieving both leverage and scale rather than getting routinely taxed by tactical data and system issues. Your technology and IT integration planning should begin early, ideally during diligence.

Without an early, intentional approach to post-close IT integration, investors risk an administrative tax — the costs of manual work to get the management team the data it needs to operate efficiently and identify improvement initiatives. When IT isn’t addressed thoughtfully upfront, management teams face persistent pain points and constraints on their ability to lead and to meet investor mandates. Examples include manual, error-prone financial close processes involving extensive Excel-based reconciliations or quarterly board reporting that rely on a “workbook data warehouse,” bogging sales teams with data requests for information that should otherwise be readily available.

Additionally, when companies with loosely coupled platforms are taken to market to sell, investors are finding they’re not getting anticipated returns. Often, feedback from prospective buyers reveals that they assumed the target’s technology integration was complete.

Other sell-side risks include challenges pulling required data together for reporting, normalizing critical data, and creating a sell-side data cube to aggregate data for analysis on multiple dimensions. Sellers may have missed opportunities to realize synergies. And technical debt — the cost to bring an acquisition’s technology in line with expected performance and maintain it there — impacts the capital expenditure needs for buyers, which in turn can impact price.

Technology integration planning starts during due diligence

Avoiding these risks requires a digital blueprint, and developing the technology integration blueprint for your acquisition should start well before your transaction closes, ideally during the diligence phase. 

Integration planning won’t look the same for all transactions, and diligence should be tailored based on the technology-related specifics of your target and the deal. Is there custom or homegrown software in the mix? Then you’ll want to include a code review to scan for licensing risks, vulnerabilities in the code, and gaps to best practice.

Is there personal health information in play or other regulatory requirements? In these cases, you’ll want a deeper dive to assess data controls and ensure clear data privacy measures are in place.

IT integration planning blueprint considerations

Some of the critical IT aspects to address in your tech integration planning blueprint include:

• How IT is managed — outsourced (fully or project-based) vs. in-house.
• Primary ERP and accounting systems.
• Email and other communications and calendar applications.
• Consolidated file storage and shared access, including cloud usage and access.
• Consistent configuration of cybersecurity, IT, and data security tools and controls.
• Standardization of IT infrastructure.
• Management and control capabilities.
• How IT supports your operating model, performance improvement initiatives, and value creation plans.

Additionally, you’ll want to consider the relationship between technology and other strategic initiatives, such as increasing the timeliness and quality of financial reporting, improving pipeline visibility, or missed opportunities to realize synergies. Often, the success of seemingly business-oriented goals is predicated on a corresponding IT system project like a CRM implementation or accounting system upgrade. Always consider how your strategic efforts can be advanced more effectively when technology initiatives are well aligned.

Keep in mind that IT integration doesn’t necessarily mean homogeneity or uniformity. Not every location or portfolio company must be fully standardized for each system across your entire portfolio. Instead, focus on practicality and consider options. For example, instead of implementing a new ERP system, maybe a business intelligence solution or other data consolidation solution might be more practical and still deliver the insights you require.

The importance of cultural alignment and change management during blueprint implementation 

Once your deal closes, it’s time to execute on your digital blueprint. Oftentimes IT integration is part of a larger integration effort, alongside human resources, sales, and other functions. It’s important for IT integration to be prioritized as a key workstream within your overall integration management office. Put another way, integrating IT needs to be a key pillar out of the gate.

Change management and an aligned organizational culture are key to successful acquisition IT integration. Investors commonly express trepidation about how to work with new management teams post-close. A proactive, intentional IT integration plan supports alignment and collaboration; shared tools, platforms, intranets, etc., all support a more cohesive organizational culture.

Meet new businesses where they are, whatever their technology maturity level. Solicit input and involve individuals from the acquisition in the process. Embrace diplomacy. A crawl-walk-run approach can help implement change at a pace the organization can tolerate.

Build an IT infrastructure for current or future state?

Investors often ask whether they should build their IT infrastructure to accommodate the current footprint of their acquisition or future growth for the combined business — in other words, how to best build for both today and tomorrow. The answer? It depends:

• What does your acquisition pipeline look like?
• What add-ons are you planning? 
• What are your target EBITDA goals for exit? 

You want to build your IT infrastructure to be mindful of those plans. 

Reap benefits of proactive IT integration through to exit 

An intentional approach to IT integration that starts during due diligence and continues post-close delivers value in several ways: improved operations, synergies and cost savings, a galvanized organizational culture, and a smoother exit.

Financial benefits include new opportunities to gain economies of scale and rationalize IT spend. Identifying a target’s technical debt during diligence can provide a lever for price negotiations. When you develop a solid IT integration planning blueprint early, you’re better able to bifurcate technology costs to remediate and maintain versus to grow and scale.

At exit, proactive IT integration enables you to: 

• Meet buyer expectations around technology maturity and integration.
• Avoid presenting an IT environment saddled with technical debt.
• Streamline data consolidation and data cube processes using modern and integrated business systems.
• Demonstrate the value-add performed during your investment and provide buyers a potential go-forward vision.

Technology and IT are critical to successful performance of new acquisitions and value creation. A proactive, deliberate approach ideally begins when you start due diligence. Develop your IT integration planning blueprint early to leverage the benefits, accommodate future growth plans, and minimize sell-side risks when you’re eventually ready to take your new acquisition to market.