7 areas of digital diligence in private equity deals
As digital technologies transform industries, private equity funds seek targets with digital assets and capabilities that they can leverage across the platform to meet customer needs, boost hold period operating cash flows, and increase the ultimate value of the platform upon exit.
Given the power of digital transformation to drive value and growth, digital diligence is now taking center stage in many PE firms’ acquisition strategies.
Digital diligence is about more than identifying risks. Starting in the earliest stages of the deal lifecycle, funds are looking for opportunities to leverage digital assets to discover and maximize value across the platform. Following are seven key areas of digital diligence and questions that can help to sharpen this lens on profit enhancement.
- Does the company have a defined digital strategy?
- Is that strategy tangential, or is it a core part of the corporate strategy?
- How effectively is the target company leveraging ecommerce, social media, and automation to drive its business and create proactive relationships with customers and suppliers?
- Does the target have a competitive advantage (e.g., strong social media presence, automation technology) that could be leveraged across the platform to help jumpstart a digital strategy?
- Does the company build or maintain any proprietary digital tools across its digital properties, such as survey tools, product customizers, personal shopping, or guided selling tools?
- How does the company manage digital content, such as media, written content, and proprietary tools available on digital properties?
- Does the company have a corporate-wide social presence? If so, does it have policies governing the use and management of social media?
- Is the IT function sufficiently staffed to support the business?
- Does the company outsource any part of the IT organization?
- Are key business systems managed in-house or by a managed services provider?
- Would the loss of any one person who has deep knowledge of a critical system or process pose an immediate problem to the company (i.e., key-person risk)?
IT policies, procedures, and controls
- Does IT have formal policies and procedures?
- Is there a formal steering committee that helps approve and prioritize IT projects?
- Does IT use monitoring tools to get alerts if a server goes down?
- How many total users does IT support?
- Does IT use a help desk system to track and record issues?
- What percentage of business applications are on-premise, cloud-based, and hybrid?
- What percent of the office is proficient in each application, and how regularly are they used?
- Are any new systems implementations planned or underway?
- Do users frequently need to work around the system due to limited functionality or lack of integration?
- Does the company use a human resources management platform? Is it on-premise or in the cloud?
- Are any systems generally lacking needed functionality or not suitable to the company?
Major IT projects
- What major IT projects have been completed in the last two years?
- What major IT projects are currently in process?
- What IT projects are planned for the next three years?
- What business benefits are expected from each of these projects?
- Has the company’s network or environment experienced a penetration?
- What protocols are in place to prevent cyber-attacks, penetrations, or intrusions?
- What security technologies are deployed?
- If a breach did occur, what would be the likely impact? How quickly would the company be able to recover?
Digital assets can add significant value to an acquisition. But waiting until after a deal has closed to assess technology infrastructure, as was done in the past, is no longer sufficient. Digitally focused PE funds must identify a target’s digital assets and capabilities early in the transaction to facilitate a successful deal and post-merger integration. Learn more about a modern approach to the transaction and value creation playbooks.
How Digital Helps Private Equity Firms Realize Value Throughout the Investment Lifecycle
InsightFor independent sponsors, access to capital is no longer a constraintClaudine CohenIndependent sponsors continue to grow stronger as an alternative to traditional private equity, and their 2021 outlook is bright, Claudine Cohen writes. Read more.
InsightBecoming a more effective corporate development officer (CDO): Why flexibility and relationship-building are keyRead about factors critical to corporate development officers’ success in driving M&A, strategic partnerships, and other business development functions.
InsightMiddle Market Deal SourceSign up to request an invitation to our next Middle Market Deal Source event