High level questions to know before getting mired in details and deadlines
This may sound very basic, but it’s terribly important. As you’re considering an add on acquisition, the approach will differ somewhat as you determine the strategic intent of the add-on you are considering. We use the terms “Similar” and “Complementary.” The former is all about increasing ultimate exit values by securing an investment(s) that adds scale to your Portfolio Company’s existing business model. The latter is about adding exit value by acquiring a business in a related area.
To ensure you are getting what you think you’ll be paying for, the high-level questions to ask yourself are somewhat different. And, the answers may surprise you. This Soundbite, Part I, outlines the IT questions to ask related to transactions that are “Similar” in nature. Part II, “Complementary”, will appear in a subsequent Soundbite. Given our 14+ years of working exclusively with Private Equity Firms, we believe this two-part approach will provide practical information you can use to gain some early insight into the transaction.
“Similar” add-on acquisitions are designed to offer the Private Equity investor the opportunity to add scale — revenues and profits — to your Portfolio Company’s existing business model. In other words, it’s all about cost-effective market share increase in an existing segment rather than expanding the segment per se. As example, when Proctor and Gamble decided to increase their share of the household detergent market they purchased and marketed Gain Detergent, a popular priced brand that did not compete on efficacy with their premium price leader Tide.
Consequently, we believe “Similar” IT diligences should concentrate on near-term operational efficiencies. Efficiencies that can be identified and targeted pre-acquisition. This process provides an important marker on how much you are paying for each million dollars of projected revenue increases. A few questions to consider:
- Can economies-of-scale be created through changes in infrastructure (organization and plant)?
- Are selected or merged purchasing efficiencies available?
- Can we identify critical data needs versus unneeded/underutilized data collection?
- Can we merge critical data centers to improve information flow and reduce costs?
- Can processing power, networks, servers, and storage be consolidated by implementation of a best-of-best approach?
- Can we reduce/eliminate duplicate applications by modifying/configuring/integrating existing software?
- Can migrating to the cloud reduce infrastructure demands?
Word to the Wise
We recognize competition for good Portfolio Company deals is at a premium. But, the ultimate responsibility is to shareholders and stakeholders, so taking the time to understand technology in the beginning can prevent lots of post-acquisition headlines. Our suggestion, find a technology partner that can think both high-level operations and day-to-day IT needs. Better yet, feel free to give us a call to schedule time with one of our IT Specialists. There’s no cost, no obligation. Just another way of PIP saying thank you for your business and support.
Also, read Part II of this two-part series, “Eight Questions to Ask Before Closing a Complementary Add-On”