Due diligence is an essential part of the transaction process during a business merger or acquisition. The main goal of IT due diligence is to identify possible IT-related risks and opportunities that could impact a buyer’s investment. This involves gaining a clear and complete picture of the quality of a company’s IT capabilities. Before completing a merger or acquisition, the team assigned to IT due diligence has the task of assessing a business’s worth in both tangibles and intangibles, along with potential risks that could carry over after the transaction’s completion.
There are two main types of IT due diligence: soft due diligence and hard due diligence. While these two processes have many similarities, there are also some distinct differences to consider.
Soft IT Due Diligence
During a merger, acquisition or similar business transaction, many organizations tend to focus on cost and numbers rather than the people behind the business. Soft due diligence involves the investigation of the overall health of an organization and the people that run the business. For example, an IT due diligence team may analyze the talents and value of a company’s IT team to measure the growth potential.
Soft due diligence can be more challenging to conduct than hard due diligence, as soft due diligence puts a direct focus on the people behind the enterprise rather than the company’s finances and records. While many businesses make capital a top priority, the people who run the business can be just as crucial.
Main Concern Is People
Soft due diligence puts a focus on people, meaning employees within the business and the company’s customer base. Performing soft IT due diligence involves looking at how a targeted workforce will interact with the culture of the acquiring corporation. To maintain motivation and help improve the likelihood of the deal’s success, soft due diligence will review compensation packages, benefits and other incentives designed to increase the wellbeing and happiness of employees. As changes in operations and culture can also impact customers, soft due diligence will also analyze how customers may respond. Customer reviews, test market data and other resources may be used to perform an analysis.
Hard IT Due Diligence
While soft due diligence focuses on people, hard due diligence puts a focus on the numbers. Hard due diligence is driven by legalities, math and strategies. When performing hard due diligence, businesses often look at earnings before interest, cash flow, the aging of receivables and payables, capital expenditures, and depreciation and amortization.
During hard IT due diligence, a due diligence team will conduct an in-depth analysis of a company’s infrastructure to identify possible technical or security issues within the IT environment. IT due diligence also promotes the identification of potential infrastructure and cloud-cost savings.
Main Concern Is Numbers
As a company progresses through a merger or acquisition, it is vital to look at all of the facts presented to them to determine where a company stands and what risks they face. This process involves examining numbers from financial statements, company records, employment agreements, existing contracts, business model strategies, marketing plans and similar documents. With this information, businesses are able to more easily identify potential liabilities and weaknesses.
Engaging in a merger or acquisition is all about reaching a potentially profitable opportunity. To determine if this is possible, hard due diligence is required before closing a deal. In today’s litigious society, businesses must also ensure that they have properly identified all possible liability issues that could arise from M&A activity. During IT hard due diligence, a due diligence team may establish security procedures and baselines to reduce risks and mitigate IT integration hurdles.
How They Work Together
Performing due diligence requires taking an in-depth look at many aspects of a business, from facts and figures to human capital. For this reason, it is important for companies to exercise both soft and hard IT due diligence. Hard due diligence is indeed the primary type used by businesses when assessing whether profit can be generated from a deal. However, the talent, leadership and skills of the company’s people should never be ignored. According to Investopedia, more than 50 percent of M&A deals that fail do so because the human element is ignored.
Risk Management Consulting Done Right
The process of IT due diligence serves a number of crucial functions that can benefit both buyers and sellers during a merger or acquisition.
A comprehensive IT due diligence process should carefully evaluate an overall IT strategy, identify operational improvements, pinpoint hidden IT costs, evaluate intellectual property and recognize potential transition issues.
Due diligence helps to create more awareness and increase comfort for both parties acknowledging what is expected from either side to close the deal. If due diligence does uncover problems that are too extensive to address, the buyer is able to back out of the deal before money exchanges hands. For more information about IT due diligence, speak with a risk management consultant at Hartman Executive Advisors.