Updated: Aug 16
A big decision when conducting technology due diligence is whether to work with one-man bands, small, or large consultancies.
The answer is not straightforward and situationally dependent.
There are certainly pros and cons across the board, and there is no winner or loser but a palette of possibilities. In working with private equity general partners over the years, here are a few criteria others consider:
Technical Due Diligence 2.0: Most businesses today are either technology companies or fully technology-enabled in one form or another with an acute impact on the EBITDA and exit multiples. The focus should be on modern Technology Diligence 2.0 providers that take a more strategic 360 holistic approach for better outcomes and risk reduction (see Technical Diligence 2.0).
Deeper Relationship: Building a long-term relationship with a provider is important as you will develop a shared understanding of cooperation which will eventually make the mechanism of working together easier. It is certainly easier to accomplish that with one-man bands or small consultancies.
Providing Consistency and Data: Knowing what to expect from due diligence, getting consistency, data baseline, and benchmarks will help with the decision-making and value creation execution. Working with the same providers helps, but bottlenecks can become a challenge if your deal pipeline is high. Small agile consultancies are a good match for this vs one-man bands.
Handling Deal Pipeline: The decision really depends on how large the fund is, the number of deal teams, and how many deals are in a year. One-man bands are hard to scale unless you hire and manage a bunch of them, which can be challenging. Small consultancies can be a great option up to a certain point where large providers may be more suitable.
Key Dependency Risks: Having dependencies on a single provider can be limiting, especially on one-man bands or very small consultancies. This can especially be a challenge during competitive and conflicting deals - larger firms are better adapted to handle this demand and complexity. Hence, small and large consultancies are a good option for this or a combination of two consultancies.
Cost and Value: Most Private Equity deal teams focus on value vs price. While frugality is always a great thing, the value-based approach is really what most seek, allowing them to extract as much guidance as possible and use that to their advantage. For example, those providers that offer more of a technology diligence 2.0 approach and provide insights into value creation vs. a snapshot in time with static risks are far more desired than those who don’t.
Specializations: Although seldom, in some instances, there may be a specific subject matter expertise (SME) that must be provided or an industry experience that is a must. This is naturally a key element within commercial diligence, but as contemporary diligence tracks tend to interact, the requirement may be a necessity on the technology side as well. Small and large consultancies are best for this.
Bundling: We’ve seen investors bundle different streams of due diligence (e.g., Commercial and Technology) for either minor cost savings or to avoid a slight increase in management overhead. While it may seem intuitive, bundling can be risky because of potential conflict of interest, group-think limitations, or lacking the right expertise. Some providers are very well set up to provide bundling and house the right deep expertise as well. When bundling, it’s important to ensure the process is healthy and the right experts are available.
Comparisons and Benchmarks: One of the important valuable aspects when comparing technical due diligence providers is their ability to compare companies and provide benchmarks. Small providers may struggle to accomplish that due to limited exposure. The relative ranking provides very useful metrics on a potential target.
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About the Author
Hazem has been in the software and M&A industry for more than 26 years. As a managing partner at RingStone, he works with private equity firms globally in an advisory capacity. Before RingStone, Hazem built and managed a global consultancy, coached high-profile executives, and conducted technical due diligence in hundreds of deals and transformation strategies. He spent 18 years at Microsoft in software development, incubations, M&A, and cross-company transformation initiatives. Before Microsoft, Hazem built several businesses with successful exits, namely in e-commerce, software, hospitality, and manufacturing. A multidisciplinary background in computer engineering, biological sciences, and business with a career spanning a global stage in the US, UK, and broadly across Europe, Russia, and Africa. He is a sought-after public speaker and mentor in software, M&A, innovation, and transformations. Contact Hazem at firstname.lastname@example.org.