The Importance of IT Due Diligence in a Media Purchase
IT due diligence is one of the most overlooked processes in the pre- close stages of buying lower mid-market companies. Although many deal professionals are thorough with other diligence, IT matters tend to barely enter the conversation.
Jim Hoffman, trusted authority on IT Due Diligence and author of the IT Due Diligence Guide, says that though many investors don’t have the resources to conduct IT diligence easily, it’s getting harder and harder for them to ignore its necessity. “Technology is becoming integral to every business — even if it is just their website or their email,” he says. “These most basic aspects present real potential risks.”
The good news is that unless a company’s technology is not scalable with the business or is falsely represented, almost anything can be resolved. “Almost any technology issue can be remediated with enough capital,” says Hoffman, “which makes doing [diligence] before the deal that much more important.” Do your IT diligence early so that you can incorporate it into how you ultimately price the deal.
Answer these three questions
IT diligence is focused on spotting and anticipating future hurdles and costs. Even if you are unfamiliar with technology yourself, you will likely be able to sense areas causing the company concern or that might present challenges down the road.
Explore these vital IT diligence questions thoroughly:
- Does the company really own its supposed product?
While this question is likely covered during other diligences, it is critical to dig into it in IT diligence as well. If they do not, it could pose the greatest risk to the business model and cash flow.
- Is the technology integrated/constructed the right way?
This refers to the quality of the product and deals with issues like licensing,
IPs, and sustainability. Was the technology built/implemented by employees or contractors? Are those people still available? These questions help to avoid any major legal or operational challenges once the deal has been closed.
- Can the technology scale?
While each integration plan is unique, it’s important to ensure that the technology of the acquired company is scalable. Ensure that the technology can scale and integrate with new marketing and sales organizations. If it requires a complete re-architecting, it’s important to include that in the contract.
Check all the boxes:
Confirm the technology is real
Determine the technology’s compatibility with yours
Verify that you have tech support
Uncover licensing risks
ID key employees and determine how you will keep them
Examine current resources and how soon tech will need to be updated
We Can Help!! Established in 1959, W.B. Grimes & Company has represented publishers and financial buyers in the sale and acquisition of over 1,500 media properties. And has appraised thousands of others. The Company maintains offices nationwide, staffed by senior level associates, who each have many years of highly successful publishing experience. To confidentially review your situation, please contact, Larry Grimes, President, at (301) 253-5016 or via e-mail, [email protected].
Grimes, McGovern & Associates provides expert advice during all phases of a transaction. Contact us today for a confidential consultation: John McGovern, CEO, [email protected], (917) 881-6563.
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