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Private equity investors seek to increase portfolio company value through various initiatives. These initiatives can be internal-driven, such as optimizing existing assets, or external-driven, such as rolling up smaller companies to increase market, product, or service coverage.
For a roll-up merger, conducting commercial due diligence helps screen major risk elements and ensures the company is operational, sound (market wise), and customers are satisfied with the offering. While this process often delivers answers to your typical investment questions, there is one topic that is often overlooked that can create challenges post-acquisition—specifically, the quality of data and systems.
Data and systems are known to be messy across all company sizes and for many reasons:
- Lack of understanding of data and what needs to be tracked and why
- This is most common in smaller companies as they tend to maintain data in siloed environments, Excel files, etc. due to their scale.
- Prioritizing competing needs during data and system migrations to save time and cost
- A majority of companies go through multiple system migrations as they grow, creating challenges around porting data to new systems, adhering to new forms, fields, etc.
- Due to the time and cost of implementation, one might transfer part of the historical data to the new system and keep others in the old format.
- Now imagine doing another system migration in a few years—the process will repeat and create a cascading effect on data quality.
- Lack of company resources and the right talent
- Sometimes, current issues are a known concern to the company leadership, but the team doesn’t have the time or the capability to address and fix.
What could happen if you acquire a company with potential data and system issues? You will not see issues at first. The company may perform at a similar level to the past, indicating that all systems are working properly. However, the challenges will start to form as you plan to execute new strategies, or you want to make decisions about optimizing the capital.
- Time to receive a critical report is not satisfactory
- Imagine taking two weeks to create a report for an initiative that requires weekly monitoring.
- Inability to track performance across the portfolio cohesively
- Overall, it will slow down growth, and the company will not be able to keep up with the rest of your portfolio impacting the company value at exit.
The good news is investors can get a feel for the data quality during the diligence by asking questions and observing the quality of reports and the time taken to get back to this type of “double-click” questions. Here are some common responses we see during our work that create a red flag on the data quality:
- “We can’t trust our data before 2021.”
- “It’s a massive lift for our team.”
- “We know that data is somewhere, but the person handling it left the company last year.”
Stax has processes and products built to identify these type of data risks and create an action plan during diligence or help bridge the gap post-acquisition.
As part of the traditional diligence, Stax data scientists run analytics to support the key investment questions. Stax includes suggestions and a summary of the data quality compared to the hundreds of companies we have evaluated in the past.
Stax offers data and system evaluation as an add-on workstream which provides an in-depth assessment of company data, systems, and analytics maturity. If investors are running a diligence with a different consultancy firm, Stax can run the assessment process in parallel.
For post-acquisition situations where you want a faster solution without waiting 12 months for a new ERP implementation, Stax has products that take and unify data from multiple systems and companies to build business intelligence solutions that can drive immediate value.
- Our approach is always insights and value-driven, thus ensuring each milestone adds business value vs. a pure software development project.
- The process starts with connecting and taking data out of the existing systems, minimizing any disruptions the BI solution has on day-to-day operations. We work with the key stakeholders at the company and the portfolio operations to ensure the outcome satisfies all parties.
- The final product acts as a platform for future acquisitions, allowing faster, more cohesive reporting at the fingertips of the company and your portfolio operations team.
About the Author
Asiri Silva is a Senior Data Science Manager at Stax with over a decade of experience helping companies unlock value through targeted data science initiatives.
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