Getting IT Due Diligence Right in your Next Carve-out Purchase

A carve-out involves the sale of a non-strategic business unit, subsidiary, or line of business from its parent company. The magic is to insure the newly separated entity maintains its value during and after the carve-out process. One of the central, and most challenging elements, of this value preservation, are the systems, technology infrastructure, and data required to ensure business continuity as a standalone company.

Private Equity (PE) firms recognize these IT elements are an irksome challenge when considering acquiring a business that must be carved out from the sellers’ organization. The good news is that proper IT due diligence can help PE firms make informed decisions and help them avoid missing carve-out opportunities that can deliver real value when successfully uncoupled from the parent company.

In a recent project, technology carveout complexity, including critical data migration from existing systems was vastly underestimated by the buyer. Failing to acquire critical customer data could have significantly hampered the buyer’s ability to operate a carveout business. It wasn’t until the technology diligence team completed a three-week deep dive into the licensed IT systems and business applications that the complexities of data migration became clear. To make matters more challenging,

it also became apparent that the people who own and run the IT systems wherein the data is stored were not planning to move to the new carveout business. Proper data migration in our case, customer contract information, is just one example, others include employee data, vendor information, legal data, and the list goes on. This is one example of why details matter and why a potential buyer needs to be very specific in outlining what is in and what is out during the deal negotiation.

Another area where robust technology diligence is a requirement is the risk/ reward analysis associated with evaluating the technology required for operating the carveout as a standalone entity. On the one hand, legacy technology costs can be significant as the buyer will need to replicate most of the existing infrastructure to ensure business continuity. This becomes more important if technology is central to the differentiation and value of the business. On the other hand, depending on the maturity of the technology associated with the carveout, a significant cost savings opportunity may be staring the buyer in the face.

The term to be used here is, Business Transformation Mapping, meaning an articulation of opportunities to make employees more productive and in the process run the business more efficiently. In addition, opportunities will also be uncovered to make the new carveout more competitive in their market space and increase market share and revenues. This business transformation can be achieved through the deployment of business process improvement software solutions.

These purpose-built software solutions are enablers for typical business functions such as HR, Finance, Marketing, Sales, Logistics, and Supply Chain Management. Technology due diligence teams can propose replacing overly complex, headcount-heavy, expensive legacy systems with more contemporary easy-to-use, and less costly solutions. This is perhaps the largest overlooked area of IT due diligence, where all eyes are focused on legacy systems costs, and no one is examining business process improvement opportunities.

Final thoughts

Thoughtful, well-executed IT due diligence is a key tenant of a successful carve-out plan. Detailed Transition Services Agreements (TSAs) play an important role in determining which IT systems will be provided to the seller and for how long, please refer to my article “The critical elements of Transition Service Agreements that you need to have on your M&A radar screen” for details.

At Uptrend labs, we have the depth of understanding and the technological know-how to guide you through the complexities of an IT due diligence project. Contact us to discover a new kind of collaboration, a new kind of approach to technology, and business, and of course, the best practices for ensuring you maintain the real value and business continuity of your next carveout.