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Contemplating a Liquidity Event or Capital Raise? How Preparing for the Transaction with Technology Due Diligence Can Make You Stronger


An organization’s information technology (IT) infrastructure is one of the primary assets that acquirers, investors, lenders, or a company executive preparing for a transaction should pay particular attention to when conducting due diligence in advance of a transaction. Acquirers, investors, and lenders recognize that a solid IT foundation can indicate a company with more accurate financial information and stronger risk safeguards.  IT due diligence is a process that business executives should champion as a company may fetch a higher valuation if IT diligence was conducted as part of the sell-side due diligence process.

A robust IT function (people, processes, and technology) can tell an acquirer, investor, or lender a great deal about a company. A robust and scalable function will typically indicate that the acquisition target or borrower has the processes and technology in place to support the growth of the business. The right-sized IT function and integration across systems also provides the acquirer, investor, or lender with increased comfort that the company’s financial information is based on accurate and reliable technological processes. Acquirers, investors, and lenders know that without the right IT people, processes, technology, and integration it is difficult for organizations to produce trustworthy financial data and provide the necessary scalability.

Just as a weak IT infrastructure may concern acquirers or investors and impact the valuation of a target company, a strong IT framework with the right processes in place can act as an enabler of a potential liquidity transaction. Accordingly, it is vital for company executives to understand the goals of IT due diligence and acquirer/investor/lender requirements from a technology perspective so that they can better position their company for a liquidity event or capital raise.

The most prominent feedback received from companies who executed a transaction is that they regret not preparing for IT due diligence as acutely or proactively in advance of the transaction. Accordingly, to assist companies who are contemplating or who are in the midst of a liquidity event or capital raise, CohnReznick presents the following five steps that organizations can take to improve their IT infrastructure, impress upon prospective acquirers, investors and lenders, and support the value of the organization.

1. Align IT Strategy with Corporate Strategy

Many mid-market companies do not have an IT strategy. That is a mistake. If a company wants to attract an acquirer or investor, it should develop and hone its IT strategy well in advance of due diligence. Companies should begin by examining the IT function as a whole and determining whether they have the right people, processes, and technology in place to support the goals of their business.
For instance, if the corporate strategy is to grow from $20 million in revenue to $50 million over the next three years, either through acquisition or organic growth:

  • Does the organization have an IT infrastructure that can scale with that level of growth?
  • Can the core applications support a rapid rise in the number of transactions?
  • Can disparate software systems handle a spike in volume and the resulting strain of increased data flow?

If the IT infrastructure is insufficient to support the level of projected growth, the valuation of the company could suffer. In addition, acquirers or investors who are reluctant to invest in new or upgraded systems could be resistant to pursue the company further or at the very least, reduce the valuation by the amount of required upgrades.

Aligning IT strategy with corporate strategy is not complex – in concept. However, it can be quite difficult in execution, especially if a company has never previously attempted aligning the strategies. Initially, it is critical that the executive leading the IT function has a presence and a voice at the C-level executive table and understands the future direction of the business overall. Going forward, it will be vital for the head of IT to work closely with the various business units within the company to support their needs as the organization matures and expands.

2. Reinforce People and Systems

Effective people are crucial to any IT infrastructure. Therefore, acquirers and investors will take a close look at IT personnel, their roles, and responsibilities. They will quickly ascertain whether the target company has the appropriate IT team in place with the right level of technical skills and sophistication.

CohnReznick advises its clients that acquirers and investors will also want to know if the company has a strategic-minded IT leader who is driving the IT function and making advantageous decisions. Does the IT leader have the appropriate expertise and mindset for the position? The investigation will not stop there. Acquirers and investors will want to determine if the company has the appropriate skill sets throughout the IT organization, whether the skill set applies to applications, network or security. If not, it is likely that they will contemplate whether personnel changes are required to be made and will analyze the associated cost impact.

Acquirers and investors will also expect some assurance that all business systems – including inventory management, manufacturing, and HR applications – are modernized and integrated. Are there manual processes required for data to flow from various systems into the general ledger? Is the company using the current version of software packages to keep information safe and are the packages still supported by their manufacturers? Are the systems operating effectively and producing the timely, accurate information the company needs to stay ahead of its competition?

The same standards of assurance apply to the technology used for the company’s financial, accounting, and reporting systems and acquirers, investors or lenders will want to know:

  • Are the systems producing reliable numbers?
  • Are the systems integrated, with information flowing seamlessly from one application to another, or does the organization have to manually reenter data, which may introduce errors and erode the accuracy of financial information?

3. Give IT Infrastructure an Annual Checkup

In general, CohnReznick recommends that companies assess their IT infrastructure on an annual basis in conjunction with overall strategic planning. For companies targeting a liquidity event, this evaluation should occur no less than six months before an anticipated transaction as it can take at least six months or longer to correct IT problems that are identified.

For example, if a company resolves to upgrade its point-of-sale software or improve network security, it must ensure that these initiatives are tested and running smoothly, without negative impact on the business, well before a potential acquirer commences its due diligence process.

Acquirers or investors may want to examine the organization’s IT “playbook” that outlines the software and hardware systems that are in use, as well as the flow of data between various systems. In doing so, for instance, they will want to understand how seamless the data connections are between the retail system, the general ledger system, and the back-office systems.

CohnReznick recommends that companies approach the liquidity or capital raising process with their IT policies and procedures fully documented. They should be able to explain the general IT policies in place; the security and password policies; in addition to the manner in which mobile devices are utilized within the organization. Are employees permitted to bring their personal computers to the work location and, if so, have the proper security measures been implemented? Has the organization considered the impact on security breaches on business continuity and does the company have a disaster-recovery strategy?

4. Stay Connected to Third-Party Relationships

In general, whether a target company outsources the IT function or performs it internally is not a differentiating factor. However, if an organization does outsource its IT function, the acquirer or investor may require some assurance that the target company is still engaged in the technology function. Acquirers want to observe that there are internal employees who are designated to strategically analyze IT and properly manage third-party relationships.

Middle market organizations that outsource their IT function often do not maintain an internal manager who is monitoring the IT process and strategy. The absence of this monitoring should be a red flag for PE buyers. Organizations should ensure that their providers are meeting their service levels agreements, staying up to date with new technologies, and keeping systems current.

There is also the question of whether the company is outsourcing to the proper vendor at the outset. For instance, all companies accepting credit cards for payment of goods and services are required to adhere to the Payment Card Industry (PCI) Data Security Standard for protecting credit card information and safeguarding against fraud. If a retailer organization’s IT outsourcer is not PCI-compliant, the retailer is also effectively non-compliant. Note that in the event a systems breach occurs and customer data is comprised, it is not the service provider but rather the company that hired the third-party provider that is liable.

5. A Proactive First Step

The most proactive action an organization can undertake to prepare for IT due diligence is to conduct a self-assessment in order to determine if there are areas that can be efficiently improved with minimal impact on the operations of the business. For instance, if a target company has numerous manual processes that are critical to the financial reporting process which presents substantial risk for financial reporting errors, the company should identify ways to automate these processes either through middleware applications or better integration of the systems.

Overall, preparing for a liquidity event or capital raise is an opportunity to introduce new IT policies and procedures and ensure a scalable IT environment. It is an opportunity to put the right connections in place between systems in order to ensure higher-quality data and more reliable financial reporting. The liquidity event or capital raise is also motivation for a company to create an IT action plan and demonstrate to prospective buyers that even if it does not make all the necessary modifications immediately, at a minimum, it is valuing the long-term technology needs of the organization.

Key Takeaways

Effective IT due diligence is often a matter of implementing measured steps, such as upgrading firewalls, implementing a disaster-recovery plan, and switching to a more robust online data-backup solution. For organizations contemplating a liquidity event or capital raise, it is important to note that the goal is not to incur a significant cash outlay by removing obsolete or ineffective systems and put in state-of-the-art technology. Rather, it is to identify areas in need of improvement and make strategic investments to correct them.


For more information, please contact Ira Weinstein, Co-Office Managing Principal, at or 410-783-8328.

About CohnReznick’s Transaction Advisory Expertise

CohnReznick has developed a unique M&A practice to ensure experienced, hands-on attention to the accounting, tax, technology, firm-management and consulting services we offer across a wide range of industries. CohnReznick can help companies prepare for the IT due diligence process and maximize value by providing a critical assessment across core technology areas and identifying opportunities for improvement. CohnReznick works with both buyers and sellers of many businesses. Given our extensive client base of both corporate clients and financial sponsors, our team can assist you in defining your exit or acquisition strategy and help match appropriate buyers and sellers.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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