Early-stage and Mid-Market M&A: Data Due Diligence

A typical large multi-million or billion dollar acquisition will include a comprehensive IT due diligence that assesses the value and risks of IT in a target company.  However, smaller acquisitions are less likely to have as sophisticated systems or similar IT risk.  In these cases I use a “Data Due Diligence” that focuses on a company’s data availability and use of data to compete.   

The typical progression of a successful company begins with a founder who has a winning concept for a product or service.  This concept is generally based on personal experience and is often able to propel a new company to significant revenue, selling a product to a specific customer base.  The experience and “gut feel” of the founder is often enough to drive initial success. 

However, as a company grows and revenue becomes more reliable, the initial product model will show its limitations, and the founder is likely to become more consumed by general company management.  Management of the company may fall to second or third generation owners who lack the experience of the founder.  Company decisions are delegated to company department managers such as marketing, sales and customer service.  Founders are less available for decision-making, and good decisions must be made using reliable data.  Relying on the gut feel and experience of department managers creates mismatches in company operations.  The company must also use data that can be shared for consistent decision-making and scalability.   

Effective data use in an early-stage or mid-size company can take many forms.  Groups may be operating using spreadsheets supported by simple processes.  They may have subscribed to software as a service (SaaS) systems for departments such as finance, sales or marketing.  They may use email or online document libraries to exchange data between departments.  The maturity of these data systems will likely match the scale of the company. The systems may be somewhat transient as the company grows. What is most important is the data that the company generates and uses. 

The quality of a company’s data is the most significant indicator of the ability of the company to compete and to scale in the future. An emphasis on company data will also reduce the time and cost of your IT diligence, and yield more effective diligence outcomes.   

Here are the most important questions to ask and considerations for such a diligence: 

  • What are the data sources that are used by each department – systems, spreadsheets, individual knowledge?  Does this data provide accurate, timely and detailed information that keeps the department aligned with the company’s mission as well as help operations with efficiency?  Can the company share samples of department data with you to demonstrate the function of each department?   
  • Where does the company rely on employee knowledge and what would be the impact to the business if those individuals were to leave? 
  • What data is collected directly from customers (perhaps by sales, a customer portal, or customer support) and how is it used to serve new and existing customers?   
  • Does the company have a data culture?  Are department leads aware of the value of their data, the importance of collecting data, and data use? Are they aware of data gaps to fill in the future for better performance? Does the IT staff have data skills and awareness to assist other departments in the company with data opportunities? Is company data reliable and do employees trust their data?  
  • How is data shared between departments for coordination?  What data is available to senior leaders and founders to aid in company management decisions and investment? 

Reviewing the data of a company and its use provides a unique lens into the company’s efficacy.  It can provide valuable insight into how the company can contribute to your existing business.  It also can uncover blind spots that the company may have and risks for your acquisition.  You should of course review key IT systems where they exist, but your emphasis in a smaller company IT diligence will be more valuable if you focus on data. 

Charles Leinbach is an M&A and technology leader, having spent over 30 years helping companies grow through organic growth, M&A activities and Digital Transformation. Charles has worked for global firms such as Monitor Company, AlixPartners, C-bridge, and Hewlett Packard, and now is a Principal at Downeast Growth Consultants.  Charles has supported over 40 M&A transactions around the world. 

Downeast Growth Consultants is a firm that helps mid-size companies grow to their potential through organic growth and acquisitions.  Downeast offers growth assessments, growth project implementations, acquisition diligence and post-sign acquisition services.  For more information please visit our website at www.downeastgrowth.com.   

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