With so many businesses depending on technology, investors should consider digging deep in terms of IT due diligence.
As an example, when a firm considered investing in a health care company, engineers conducting the analysis gained an understanding of the industry and where the technology needed to be for the company to grow. As they dug into the company's IT infrastructure, they discovered that the technology was not enterprise-level and would require significant investment.
This firm was about to write check for $10 million for a company it had believed was more technology-focused than it was. The investor was able to avoid that mistake, but the only way engineers understood those pitfalls was by digging deep.
An expert IT due diligence analysis will not necessarily kill an acquisition if it finds shortcomings. Often, the analysis will generate a to-do list or a suggested adjustment to the purchase price. Now that so many businesses depend on technology for their existence and profitability, IT due diligence should be a central part of the M&A process, with experts determining answers in three areas:
* What technology is being purchased? What's the state of the infrastructure? Will it need additional investment?
* Does the technology effectively enable business? Does the IT fuel or constrain the business?
* Is the technology scalable? Scalability means the IT can plug into existing - or future - environments.
It's important that whoever performs the due diligence takes an objective and expert approach.
Questions to ask include:
What is the condition of technical architecture and infrastructure? The team should conduct a thorough review of component technology, standards compliance, data structure design and code structure. Internal systems need adequate technical infrastructure - routers, switches and storage devices. Does the IT team have the right development hardware and software? How will the infrastructure integrate?
Who is on the team? Is the technology team overstaffed or overtaxed? How is staff compensated in comparison to the market? Look at risk factors such as: How dependent is the team on one developer? What happens if that person leaves? Who has the critical undocumented knowledge? The team should assess adequacy of procedures and processes and client satisfaction. What is the average response or callback time for problem tickets? What certifications does the team hold?
What is the IT maintenance and upgrade history? Examine how often products have been upgraded and the process for bug fixes.
How secure is the network? Look at anti-virus protection, firewalls, proper password protocols and off-site backup and recovery capabilities.
Are there legal concerns? Be sure to look at software license agreements and whether the company fully owns its source code.
David Boone is the CEO of Paranet, a business and IT consulting services provider.