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Merger and acquisition impose great challenges for small and medium size businesses (SMBs). Successfully executing the M&A transaction is difficult but the reward can be great, a singular milestone in the life of a business. Determining the value of a business today includes far more than what’s revealed in a company’s financial documents.

Data as an Asset – Creating Tech Equity

The data assets of an organization are major components of the current and future value of the enterprise.  Technology provides vast amounts of data that become valuable assets when standardized and enriched by a business’s development of the products, processes and services that meet the needs of customers.

Emerging data analytic  technologies that have been used successfully in other aspects of business, are now being used in M&A. These tools greatly reduce the time and effort to gather and organize data and increase the discovery of value or identify risks. Artificial intelligence, data analytics and machine learning are being incorporated into platforms that let M&A teams ingest and standardize large data sets with processing power to rapidly evaluate numerous potential scenarios.

Speed is an important capability during due diligence. It is not uncommon for the process to take 60 to 90 days to complete. During that time key staff, leaders and subject matter experts are diverted from the day to day important functions of the business to spend hours in meetings. The longer this process takes the more likely the deal will be derailed as patience decreases and frustration mounts. The automated application of AI and data analytics can accelerate the process and free up staff to concentrate on the business.

A greater benefit than speed is the insight these new platforms can provide. For the SMB this insight exposes a layer of value – the digital data asset, equity that is increasingly important to the future of the business. With focus beyond company financial data, AI and data analytics enable a new tier - Data Due Diligence. These tools can combine and analyze data to provide insights that will be the basis for new products, services and revenue streams.

SMB leaders and their C-Suite team will be able to use AI powered data due diligence to fully and accurately demonstrate the value of their business and to identify the value of potential acquisition targets.

Automation Leveraging the Playing Field for SMBs

To take full advantage of these technologies, SMBs can look to external partners.

These firms have developed advanced automation capabilities and employed people with the mindset and expertise to use these tools for maximum benefit in due diligence for M&A. The major consulting firms and partners who focus on particular industry sectors offer services based on these new platforms. They have established practices that look at M&A in a new way and take into account the full potential of businesses. They evaluate a business’s approach to data and level of digital maturity, how companies normalize their data and use it across all aspects of the business to take advantage of its current and future potential.

External partners can help SMBs avoid the cost of developing or employing due diligence expertise. SMBs though can take steps to prepare their organizations to benefit from automated due diligence.

  • Become familiar with advanced automation, AI, data analytics and machine learning. Attend conferences to see how these technologies are benefiting your industry sector.
  • Conduct pilots and proof of concept initiatives.
  • Identify individuals at different levels in your organization. Prepare them with the skillset and mindset to work with and help develop the latest digital M&A tools. Those people will help select the right partner to assist with a transaction.
  • Step away from reliance solely on the traditional M&A due diligence playbook. Use a shadow process to gain experience with new tools and data sources.
  • Become familiar with new pools of information. Data sources such as third party data and social media. They can provide a more complete picture for decision making.
  • Incorporate analytics as a core capability. Don’t use it merely as a decision aid. Use analytics as an ongoing capability for valuing your organization and potential targets.

Evolving Importance of Data Due Diligence

As an SMB, be aware of a growing trend among Private Equity (PE) firms to use AI and data analytics to continuously scan the environment. Their objective is to discover target acquisitions and to find potential synergies with sister companies in their portfolios. Analysis of the data equity a company has built combined with that of other portfolio companies will create new revenue streams or potential for cost efficiencies through consolidations. This is an opportunity for SMBs to leverage their data assets. To the extent that you can use advanced analytics, AI and ML to increase your digital maturity, you can increase your valuation and present as an attractive target.

The COVID-19 pandemic has added tremendous disruption to the M&A landscape.

Covid-19 slammed the door on M&A in February 2020. Transactions were halted in mid-process. Seller and buyers fled the marketplace. As the economy worsened, the basis for valuations eroded and traditional due diligence lost credibility.

A year into the crisis, activity has begun to return. The paradigm shift has opened up opportunities for some companies and left others in shambles. Bargain hunters are busy snapping up distressed businesses and using advanced analytics to try to discover who the winners and losers will be in this new environment and the environment that will emerge down the road.

Interestingly the pandemic has had an accelerating effect on the M&A process. The remote, work-from-home technologies used by us and our children (Zoom, Skype, et al.), along with abandonment of travel, group meetings, and social contact have streamlined the process.

Firms that once had to focus on one transaction at a time now can process multiple transactions simultaneously, in their pajamas!

Drone videos are now taking the place of plant tours and the long days that used to involve parties on both sides of a transaction and their costly consultants.

The increased volatility, accelerated pace and the discounted value of years of historical business data present challenges for advanced technologies and the M&A participants who deploy them. These challenges will, however, be met and overcome. Data due diligence as an integral part of the M&A process enabled by AI and similar tools will play a central role in defining the future business environment.

SMBs should prepare now to build data equity and to partner with the service providers who can maximize its benefit.

 

 

Michael Fillios is the founder of IT Ally, an IT and Cyber Advisory firm based in Cincinnati, serving the C-Suite at small and mid-size businesses nationwide. He is a four-time CIO, global business executive and entrepreneur with 25 years of experience in transformation, change leadership and operations management. In 2020, Fillios also founded the IT Ally Institute, a nonprofit organization that provides SMBs access to knowledge, research, and practical tools to improve their tech bottom line. He is the author of Tech Debt 2.0™: How to Future Proof Your Small Business and Improve Your Tech Bottom Line. Learn more at www.itallyinstitute.org.