7 Technical Debt Sources That Can Increase M&A Costs

Buy-side teams are highly adept at detecting issues that can affect a deal. Even the best teams, however, may miss IT and technical aspects of the deal. These issues can greatly affect the cost of integration, while lowering the return on the investment. These seven sources of technical debt can significantly lower the value of a deal, while increasing costs.

‍Staff Devices

‍Laptops, desktops, tablets, and phones are vital for getting work done. Most businesses have acquired at least one of these per employee. The acquirer must assume responsibility for these devices, including upgrades and replacements. Even in a small acquisition, there may be hundreds of devices that must be tracked. Well-managed businesses maintain careful inventories of these devices.During due diligence, this inventory can help the acquirer assess whether there are excessive technical debts in the business’s fleet of devices. If there's no device inventory, due diligence will take longer. This process is vital to uncovering hidden costs.

‍Backend Server Hardware

‍Physical servers are still the preferred choice of most businesses. These may occupy a rented data center, or be stacked in a corner closet. Acquirers need an accurate list of these assets and the role they play. Server hardware must be monitored for warranties, age, serviceable life, condition, and other factors. A server upgrade can be a demanding task, particularly for applications that are vital to the business. Acquirers must factor the costs of migration, maintenance, and updates to these vital physical assets.

‍Server Operating System Updates and Patches

‍Server operating systems are just as vital as physical hardware. They need to be checked. Microsoft, Apple, and Linux updates must be installed to address security vulnerabilities and software defects. System administrators must keep up to date with installing updates and patches. Unpatched systems are highly vulnerable. Take time during due diligence to inventory operating system patches and server security vulnerabilities. Plan for additional time—and possibly expense—after integration to address these issues.

‍Obsolete or Unsupported Software Applications

‍It’s common for businesses to use older software applications, some of which were custom built. Obsolete or old software can drive up costs when merging technical assets. Carefully inventory all software the business uses, and document all warranties, contracts, licenses, and upgrades. Knowing which business software you have access to and how much work and expense it requires can save you time and effort when you acquire the business. Addressing these issues ahead of time can save money and ensure compliance.

‍Paper-Dependent Processes‍

Businesses often still use paper. You need to know which processes are available only in paper format, how those processes are stored, whether it’s possible or necessary to convert to electronic format, etc. Paper accrues storage costs, and demands additional security and accessibility efforts. Integrating paper and electronic processes, however, can cost time and money. It also increases the likelihood of errors. Address this liability early in the process so you can plan for it during integration.

‍Duplicative Data

‍Most businesses have large databases for product, corporate, or customer data. Many include duplicate data. This can affect integration. Duplicate data can cause inefficiencies and misreporting. It also increases security risks. Duplicate data shouldn’t kill a deal, but it does not to be considered so acquirers can address security risks and the cost effects of duplicate data.

‍Custom Software

‍Custom software confers many competitive advantages. It can make a business more lucrative, and more attractive. It can also be a home for lots of scary things. A business may look attractive on the outside, but custom software can be a source of significant technical debt. During due diligence, look at factors such as software architecture and dependencies, as well as implementation. Evaluate the quality of the code, and the languages and tools used to make it. These factors affect the cost of the business, and its ability to integrate and grow following a transaction.