Customer Type: PE Firms
IT Due Diligence: Technology, Software Industry
When a private equity firm is evaluating an acquisition target, they perform thorough due diligence before making any decisions.
One part of the due diligence process that tends to come later in the process is information technology (IT) due diligence. While important in any industry, this practice is particularly apropos for companies in the technology software industry.
“For companies that have kept up, they can have a significant competitive advantage,” BluWave Head of Technology Houston Slatton says. “But for companies that haven’t embraced technology or managed it well, it can become a liability or a risk to their operations.”
READ MORE: What is Commercial Due Diligence?
What is the IT Due Diligence Process?
Here are the top-level steps involved with IT due diligence:
- Preparation
- Information Gathering
- Asset Evaluation
- Contract Review
- Risk and Opportunity Identification
- Recommendations
READ MORE: What is IT Due Diligence?
IT Due Diligence for Technology Software Companies
Here are how each of those steps could apply to due diligence being conducted on software companies:
Information Gathering
Gathering information is a rigorous process involving deep dives into the software’s architecture, databases and development practices. This phase assesses the company’s technical assets and the quality of its codebase, exploring aspects like scalability, maintainability and technical debt.
Asset Evaluation
In asset evaluation, the focus shifts to the software itself. What is the state of the product’s lifecycle? Are the technologies used up-to-date and supported? The evaluation also reviews the company’s intellectual property portfolio for patents, trademarks and copyrights that protect its innovations.
Contract Review
The contract review scrutinizes agreements with customers, vendors and partners. For software companies, this could involve licensing agreements, open-source software dependencies and third-party integrations that are essential for the company’s products and services.
Risk and Opportunity Identification
Identifying risks requires an understanding of the regulatory environment, especially for data privacy and security. What are the potential compliance liabilities? Conversely, where are the opportunities for innovation or market expansion? This step often reveals how IT can be a growth enabler or a liability.
“If you don’t use the tools well – if you don’t maintain them – a good IT diligence report is going to highlight those issues, but also will highlight those as recommendations or opportunities to drive value in the business post-close,” Slatton says.
READ MORE: How To Hire an Interim CTO
Recommendations
The final recommendations are a strategic mix of immediate actions and long-term plans. For a technology software company, this might include advice on enhancing security, improving system integration or investing in new technologies to keep the company ahead of the curve.
The IT due diligence process is integral to understanding the true value of a technology software company. It’s not just about identifying what works and what doesn’t – it’s about uncovering how the technology can drive the company forward.
Private equity firms that don’t perform thorough IT due diligence may find themselves facing unforeseen challenges down the line. But those that prioritize this step can use it to guide their investment strategy, uncover new opportunities, and ultimately, ensure that their acquisition is set up for success in the rapidly evolving tech landscape.
READ MORE: Why Mergers & Acquisitions Fail
For expert guidance through the IT due diligence process, reach out to BluWave. Our research and operations teams can connect you with the best IT due diligence experts in the industry, handpicked for your situation.
“The specialized providers in the Business Builders’ Network have in-house employees who focus on doing these types of assessments for investors,” Slatton says. “They’re seasoned technology professionals who know how to quickly assess an organization through the lens of private equity firms and other acquirers.”
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Jay Hernandez of Raymond James: M&A Process Best Practices
Jay Hernandez recently joined the Karma School of Business podcast, sharing his insights into the dynamic world of private equity.
In his discussion with host Sean Mooney, Hernandez, an investment banker focused on industrial technology, talked best practices in mergers and acquisitions.
He emphasized the importance or preparation, understanding buyer psyche and building trust and reputation.
Here are some insights from their conversation.
3 Takeaways from Jay
1. M&A Preparation
Hernandez emphasized the importance of thorough preparation before entering the market. This involves not just understanding one’s own business but also being ready for the intense scrutiny that comes with merger and acquisition processes.
“It’s never too early to prepare for that event,” Hernandez said. “You always have to be prepared.”
Mooney agreed: “The more you do that, the more luck you tend to have in business and life, but also M&A processes.”
READ MORE: Why Mergers and Acquisitions Fail
Hernandez also stressed the importance of talking to key players early in the process.
“Engage your advisors, engage your experts well in advance. And it could be even a year or two in advance,” Hernandez said.
Mooney said that doing so can ensure that all aspects of the business are aligned and ready for the sale process.
“You should probably be talking with an investment banker right now so that when that light is green, you’re getting an early start,” he said.
2. Understanding Buyer Psyche
Hernandez also pointed out the increased depth and detail in buyers’ inquiries within M&As.
“The psyche of the participants has changed, and particularly on the buyers, and where that’s changed a lot is the areas that they’re digging into and the depth of which they’re digging into,” he said.
Mooney underscored the need for sellers to understand and anticipate the buyer’s perspective. He highlighted the diligence PE firms conduct in preparing for M&A processes.
“Private equity firms are spending more time making sure things are absolutely buttoned up so that they’re prepared to move as quickly as possible through an M&A process,” he said.
READ MORE: Merger Planning & Integration: Best Practices for Private Equity Firms
3. Building Trust and Reputation
Finally, Hernandez emphasized the necessity for buyers to maintain integrity and straightforwardness during the M&A process.
“You need to make sure that you’re doing it right for the company that you’re looking at, because at the same time, you’re going to be their partner going forward,” he said.
Mooney cautioned about the fragility of reputation.
“It takes a lifetime to build a reputation and literally 30 seconds to ruin it,” he said.
Hernandez added that “99.999 percent of the groups that we deal with and the buyers that we deal with are straight shooters and do exactly what they’re going to say.”
READ MORE: Post-Merger Integration: Framework, Keys to Success
Hernandez’s entire conversation with Mooney offers unique insight into the world of mergers and acquisitions from an investment banking perspective. (Stay tuned until the end for a time- and stress-saving life hack about cooking the perfect steak.)
When you’re done listening, head to the main BluWave podcast page for more conversations with business leaders.
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Revolutionizing Healthcare: Roles of AI, Machine Learning
The integration of artificial intelligence (AI) and machine learning in healthcare is poised to revolutionize the industry by enhancing efficiency, transforming medical education and augmenting the role of healthcare professionals.
The latest Private Equity Insights Report from BluWave shows strong interest in AI data analytics as well as robust activity in the healthcare industry.
LISTEN: The Window of Opportunity: Healthcare and PE Insights
Scott Becker, founder of Becker’s Healthcare and Partner at McGuireWoods, discussed these topics with BluWave CEO and Founder Sean Mooney on the Karma School of Business podcast.
Efficiency in Healthcare Processes
Becker’s insights into the role of AI in healthcare reveal a significant shift toward efficiency, particularly in areas like revenue cycle management.
He spoke to the remarkable reduction in workforce requirements.
“You’ve got places that have 1,500 employees. They can get down to 1,000 employees with using AI,” he said.
READ MORE: Healthcare Compliance: Due Diligence Checklist
This reduction is not about diminishing the human element but rather reallocating it. By automating routine and repetitive tasks, AI allows healthcare professionals to focus their expertise on more complex and nuanced cases.
This shift is not just a matter of numbers; it represents a fundamental change in how healthcare operations are managed. Becker elaborated on the challenges faced in staffing these roles.
“A lot of those jobs are relatively lower-wage jobs where the turnover was tremendous,” he added.
This also speaks to the importance of AI in creating a more stable and focused workforce.
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Transformation of Medical Education
Becker also said that the medical education system is in dire need of an update.
“Medical school is still designed pre-internet,” he said. “A specialist isn’t out of school until they’re in their early thirties.”
This not only prolongs the training period but also imposes significant financial and mental burdens on aspiring medical professionals.
READ MORE: Professional Healthcare Recruiters: Specialized Human Capital Resources
“You’ve got this horribly inefficient medical school program and residency training program,” he added.
By leveraging artificial intelligence for educational purposes, the learning process can be significantly streamlined, reducing both time and cost for students.
Augmentation of Medical Professional Roles
There are many use cases for existing medical professionals as well. Mooney offered one example.
“They’re going to have these amazing copilots that will help do all those kind of brain sequences,” he said.
READ MORE: AI Data Analytics: Business Intelligence Tools
Mooney views AI as a tool to assist, rather than replace, human expertise. AI’s ability to process vast amounts of data and identify patterns can significantly enhance the diagnostic process, allowing medical professionals to focus on critical decision-making and patient care.
“I don’t think you could ever turn them over to the robots, at least in our visible future,” Mooney added.
The integration of AI promises to elevate the quality of healthcare, making it more precise, personalized and effective.
While the potential of AI in healthcare is immense, challenges such as resistance to change and vested interests could impede its adoption. Its future prospects, however, are promising.
The integration of AI and machine learning in healthcare represents a significant shift toward more efficient, effective and personalized care.
The invite-only Business Builders’ Network is full of AI experts who work with healthcare businesses on a regular basis.
Connect with our research and operations team, and they’ll provide a short list of tailor-made resources within 24 hours.
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Why Private Equity Invests in People for Growth
Human capital is a driving force for growth in private equity. A recent BluWave-hosted webinar delved into three leading trends in this service area:
- The rise in human capital investments
- The importance of specialized recruiters
- The value of interim executives
Here are some insights into these topics from Account Executive Evan Garoutte and Research and Operations Consultant Taylor Lee.
Human Capital Emphasis
The trend of investing in people for growth continues to gain traction.
READ MORE: Why Hire an Interim CFO
“Human capital activity has been steadily growing and reached an all-time high in Q3 of this year, accounting for 49 percent of all activity coming through the BluWave network,” Garoutte said. “It’s the number one trend in the industry.”
This reflects a 20 percent increase year-over-year, underscoring the importance of investing in talent for organizational growth and value creation.
Using Specialized Recruiters
Engaging specialized recruiters is crucial for efficiently filling both executive and non-executive positions, particularly during growth phases.
“They stay up to date on market trends, salary range and emerging skill sets, which is extremely valuable. The knowledge allows them to identify and attract top talent who possess the right qualifications and of course, and most important would be a cultural fit to the organization.”
READ MORE: Why Hire an Interim Chief Executive Officer
Value of Interim Executives
Interim executives, especially in pivotal roles like CFOs, CEOs and CHROs, provide stability and continuity during transition periods, crisis management and special projects.
“PE firms have found value in being able to try before they buy. And we’ve seen interims convert to full-time employees about a third of the time internally,” Lee said. “There’s just value in confirming that this person can positively see our portfolio companies in the right direction as well as confirm that they’re a culture fit.”
READ MORE: Why Hire an Interim CTO
The discussion underscored the critical role of human capital in driving growth, indicating the various strategies that private equity firms and their portfolio companies can employ.
BluWave’s invite-only network of human capital resources works with PE firms daily to fill needs related to human capital, as well as a wide array of other service areas.
Contact our research and operations team for your next project and they’ll provide a short list of exact-fit service providers within 24 hours.