This article is the first of four that are published in partnership with the M&A Community and are featured in Dutch on their site. As a service we also provide the English version for you, here.
The Role of Technology in Revenue Growth
When private equity acquires a company, the ambition is often to multiply revenue. Growth is expected to come from three sources: more channels, more countries, and more products. This is only possible if the technology is in order and ready for growth. For investors, it's important to know the state of the systems. This can be assessed through a tech due diligence.
Consider a company with an omnichannel strategy, which combines physical stores with online sales through various channels. The IT landscape has multiple layers that work together, ranging from marketing and sales to operations and logistics. This is called the technology stack, the sum of all software within the company.
It starts with marketing automation, which ensures visibility in places where customers are present. Then there's the e-commerce platform that processes orders and handles payments. In addition, there's an operational layer for inventory management and a service layer that enables return processing.
Significant damage can occur if one of these components fails to function. If the checkout is down, purchases stall and no revenue comes in. If the data flow is disorganized, inventory problems arise, such as mismatches between stock and offered products. Customers then place orders for unavailable items, leading to disappointment and negative reviews. If data integrations don't work well, management is left flying blind, unable to make informed decisions.
Is it truly more important to have legal contracts in order than to ensure critical technology functions properly? After all, the latter determines whether the company remains operational.
The technology stack is often not scalable. A few million euros in revenue requires a vastly different stack compared to a hundred million euros. What works on a small scale might not work on a larger one. This is particularly relevant when a company needs to grow by two or three times. This increase in complexity demands more flexibility, and the technology stack must be prepared.
Due diligence is the process of assessing where a company stands. Tech due diligence does this for systems. Are there substantial outdated codes? Are software packages well-maintained? Do integrations function properly? Are data dashboards accurate? The people and processes involved are also considered. How are systems maintained, and by whom? Have business-critical components been developed by people who have left the company? Is documentation thorough?
However, we often see that the technology stack is not given much attention in M&A processes. Thorough legal and financial due diligence is conducted, but tech due diligence is neglected. Is it truly more important to have legal contracts in order than to ensure critical technology functions properly? After all, the latter determines whether the company remains operational. When buying a car, it's also essential to know that it has an engine and that it's well-maintained.
Digital technology is the backbone of a modern company and prepares it for growth. It's a central part of the strategy and the driving force behind growth ambitions. As such, it deserves a central place in due diligence.
This Article was written by Jons Janssens, Co-founder of Conway & Co.
You will find the Dutch version of this article at M&A here.
