Capturing separation considerations early in the due diligence phase can significantly ease buyer engagement downstream in the sale process.
There is one certainty with M&A transactions - sellers will always be faced with two key challenges: providing relevant data in a timely manner and making themselves available throughout the due diligence process.
With a day-to-day business to run and a high number of investors seeking answers to their due diligence requests, sellers are increasingly struggling to find time and resources to keep up with the demand. This may lead to a slower due diligence process and impact the deal value (lower asking price, buyer’s loss of momentum and interest) as investors seek to protect themselves against unplanned expenditure and unknowns which could not be quantified earlier in the process.
This last point is especially relevant when it comes to vendor technology due diligence (TDD). Missing or incorrect facts can lead to a significant increase in separation costs and lead time. For most transactions, sellers would create a standard package (either a vendor TDD report or a separation blueprint), to answer common questions and then hand it over to potential buyers for analysis.
However, we are increasingly seeing clients in the high-tech sector adopting a more sophisticated bundled offering, where both a technology due diligence (TDD) report and a technology separation blueprint are simultaneously prepared and handed over to investors. Here are the five benefits of this approach:
Separation blueprints are very effective at presenting what is for sale and how a separation will take place, including a high-level view of the tech stack. However, they often fail to provide potential buyers with a quality rating of the technology stack for sale. Supporting evidence of why a separation will be complex or recommendations towards the replacement of legacy platforms’ components are often missing. Having a technology due diligence (TDD) report produced at the same time, with a separation lens in mind, will ensure that those key facts directly impacting the deal value are provided.
The ability for a buyer to use the TDD report (which can be substantial depending on the tech stack complexity) as an addition to the separation blueprint saves very valuable time and makes the due diligence process much easier. Whilst Q&A will still happen as part of the buy-side due diligence process, as the buyer seeks fresh insights, it is most likely that he can now find must faster what he is looking for in the tech due diligence (TDD) report. Moreover, having gone through the carveout report exercise, the seller would be well prepared to address buyers’ concerns during the buy-side diligence process. Equipped with that knowledge, the buyer can make informed decisions and focus on a shorter question list, making the transaction process much more efficient and quicker. Finally, the sellers’ team also benefits from having the two reports being produced simultaneously, as many technical and separation topics get discussed in the same calls, saving teams very valuable time.
One of the key outputs of a TDD report which is of high value to any buyer is the risk section. It clearly flags to potential buyers the risks around people, technology, security, process and governance, their impact and the associated mitigation steps required to address them. However, unless the TDD report gets amended later in the process, it seldom provides a remediation timeline or any progress status to the buyer. Having a separation blueprint produced in parallel, or soon after the TDD report, provides the opportunity for the seller to formulate and publish such timelines, making the buyer’s due diligence process less cumbersome. It also clearly demonstrates the seller’s proactiveness in fixing any issue, and whether the buyer would inherit any of the identified risks post Day 1.
TDD reports by themselves often do not go beyond the current-state snapshot of the technology landscape. The risk section of the TDD report will refer to separation risks, providing valuable inputs around the likelihood of happening and impact severity, but this is as far as it goes. What a buyer will really want to know and see, are the inter-dependencies and sequence of events as technology platforms and their components get separated, the data gets extracted, and the new or enhanced target infrastructure and data migration ramp-up takes place. Things like the separation and re-integration one-off costs, the teams and expertise required, and other key decision-making data are not typically made available to a buyer in a standard TDD report. That is why a buyer needs a separation blueprint. Providing the two together immediately raises the amount of information available and simplifies the buyer’s due diligence process for everyone’s benefit.
Investing valuable time and effort from the outset by producing two reports shows that the seller is well prepared for a sale and upfront about any shortcomings. It is about getting buyers’ trust through professionally presenting all separation considerations - and showing preparedness - rather than waiting for the buyer to discover them. And as much as the value of a vendor TDD is to create a baseline, it is equally important that the seller is ready to answer potentially awkward questions in a coherent manner.
It also allows the seller to reduce the number of unknowns and protect the deal value. Indeed, a thorough review by an independent third party, allows for the reports’ findings to be factored into the sale price, thus allowing the buyer less room for negotiation as the key “contentious” or “unknown” items have already been flagged and accounted for in the deal value.
For any seller about to dispose of technological assets, adopting a TDD and separation blueprint bundle approach is the key to presenting themselves in a highly professional way, by saving all parties valuable time, and quickly allowing investors to form an opinion of what is at stake and what an acquisition would entail. And most importantly, it will enhance the seller’s ability to secure the best value for the transaction.
Do not hesitate to contact us to find out more about how BearingPoint Capital can support you through selling part or all of your business.