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Adapt your technology strategy for a management buyout

Technology Strategy - Management Buyout

Post-deal issues are painful, especially if they could have been avoided

Your firm has successfully navigated the tricky waters of a management buyout.  Congratulations!  But this isn’t the time to celebrate, now the hard work begins, and you need to adapt your tech strategy accordingly. 

What do you need to do first?

The short answer is to be ready to ramp up the pace and potentially change strategy.

In previous articles, we discussed whether you’re ready for the scaling challenges ahead and to consider the type of investor or buyer you’ll be working with. Now let’s get ahead of the tech strategy and pacing concerns that may be relevant to you post-deal.

Being ready for an uplift in ‘pace’ and a change of strategy following a management buyout is an area we often stress and repeat during technology due diligence interviews.  Purely because we notice many teams do not adapt well or quickly after a deal, and we’d like them to maximise their returns for themselves and their investors.

This article focuses on critical areas of scale when investors and tech leaders are discussing pre- and post-deal. We are privy to this information from years of running technology due diligence projects and, before that, being on both sides of the table.

If you are interested in the nuts and bolts of scaling, I recommend either of these two books Reid Hoffman’s Masters of Scale or Verne Harnish’s Scaling Up book.

I believe that if a deep enough understanding is formed by both parties from the start, and there are fewer surprises (by disclosing and presenting information in a way that investors understand), it will help the long-term ‘marriage’ between both parties.

As every company and deal is unique, there are challenges generalising this topic.  So I will present three case studies covering early-stage, mid-stage and established companies – the first two being management buyout examples. This may help you see some of the differences and maybe align with the situation you have today. I have, of course, changed some of the details regarding the businesses mentioned below:

1. Management Buyout of an Early-Stage Business

Business Issue:

In this tech-enabled consultancy, management could not see critical information and data; they could not forecast or make data-driven decisions.  Post-investment, the need for this information was critical for the value creation plans.

Management previously tried to address these using consultants with no luck.  To make matters worse, employees had recently rejected the latest transformation of the in-house software products, and there was frustration that the tech leader wasn’t focusing on the right projects.

Cause

During technology due diligence, it was apparent the current tech leader had done an excellent job of creating a tech solution that helped towards business growth and attracted a PE buyer. Still, they were the wrong person for the next growth stage, which required a much higher level of governance and control. 

And they were right – the tech leader was hands-on and focused on new technology rather than creating more value from what was already available onsite—leading to a highly complicated tech strategy that was far too big for the number of resources.

Why had the employees reacted so poorly to the latest software updates?  The end users were uninvolved in the product development and avoided the new system.

Technology In Use

Bespoke in-house, cloud-based hybrid  CRM/ case-management / sales product.

Processes

Immature, with no formal roadmap and responsive to business needs.

Team

Decent CTO, inexperienced UK development team and Offshore Team.  Perfect for the task in hand (an in-house product) on the surface, but the confusing strategy and business outcomes were testaments to changes needed post-deal.

Remedies

The list below is some of the key recommendations and rationale we gave for the new portfolio business which would deliver the most benefit to the company.

RecommendationReasoning
Simplify the Tech StrategyThree significant products had been developed simultaneously, yet the customers (employees) only used the original system and rejected the third iteration.
Hire a new Tech DirectorThe current CTO was more suited to starting a new business and felt constrained by what was being requested from him pre-deal.  This would only be exacerbated post-deals so it made sense to help all parties re-arrange the leadership in readiness for the increase in pace.
Reduce the tech stack and complexityWhich would reduce costs, and increase focus.
Hire a more experienced Project ManagerThey would take some of the load of the technology leader and present data that will be necessary for both the board and investor to be able to justify and monitor the significant additional cost in the tech function.
Hire additional Business Analyst skillsTo avoid the employees rejecting the new system, ensure they are fully engaged with the planning and change process.

Strategy: Adapting the approach to technology

After much debate, it was decided to move from the pure in-house developed platform to a customised version of a major vendor’s system.  This had some pushback from the technical team but made complete sense from the broader business perspective as a known platform has less risk when trying to find qualified help or even selling on the business. However, the technology team is still required to grow and invest further even with a well-known platform. 

But now, instead of looking after all of the underlying tech, the team could focus on revenue-generating ideas and surfacing the correct data for the business.  They also engaged with a software development partner who helped build the new platform.

Pace: A new CTO, a faster approach

Mandated with a more straightforward technology brief, the CTO could focus on the critical value drivers for the business and ensure that technology was seen as an asset that provided significant benefits to the company.  (It already had been providing said benefits but wasn’t perceived that way).  But this leader needed to learn how to communicate with an institutional investor.

This involved helping him build a solid and clear argument. Having a complicated change strategy is acceptable, but how does that sum up into something concise and impactful?  This included turning his board pack around to move unnecessary data to the back and helping train him on public speaking.  It had become a challenging business for the tech team and its perception, so it was good to see him win all stakeholders over on the board.

2. Management Buyout of a Mature Business

Business Issue:

As above, this was another business running from an internal product which had done well to stand the test of time. Still, it wasn’t suitable for moving to SaaS, which was part of the new value creation plan necessary to remain competitive. The market has evolved, and customers’ needs were far more complicated, so sticky plasters were used to adapt the systems rapidly.

Cause

Tech had supported sustained growth but under-investment in technology combined with the need to respond to employees’ needs rapidly had resulted in a massive, monolithic system oozing with tech debt.

Technology In Use

They’d built an enormous MVC app with hundreds of complicated screens. There was alack of much-needed vulnerability testing and automated tests which were impossible due to architecture decisions made in the past.

Processes

A high percentage of professional services and manual labour were required per customer; hence as the business grew, so did the need to hire more people. This meant concerns around scaling and the ability to attract, train, retain and reward a much bigger team.

Plus, as the in-house software was complicated, the training was also an issue as new staff had to learn bespoke, in-house skills that were not transferrable.

Team

A skeleton crew that had done tremendously well.  They were a small, in-house development team but with minimal modern skills.

Remedies

As the type of the company matures, the remedies become less drastic and more focused.

RecommendationReasoning
Develop a clear strategy  Unlike the previous example, there was only a single tech product in the firm.  But due to the market they are in, the opportunities for technology change and the ideas from customers were enormous, which meant it was confusing.   Help was needed to help the team articulate a better story and establish a plan that everyone across the business could buy into.
Make a much more significant investment into tech.  If this firm provided a SaaS solution, they needed to invest in the company as a SaaS business.   And it’s vital this information is understood, agreed to and invested in pre-deal!
Build a modern SaaS platform  This was the CEO’s aspiration. But it needed to be justified by objectively looking at the current tech stack to see if it could be adapted.  Whilst it could, there was a risk of passing on the debt of future transformation to the next investor, potentially impacting the Enterprise Value.
Hire people with public cloud experience  This is obvious for a firm looking to adapt and build a SaaS offering but also crucial if the team are to increase confidence in the team’s ability to deliver.

Strategy: Adapting the approach to technology

Create a presentable deck. The previous one used during due diligence was long-winded and far too technical, which whilst acceptable  pre-deal would undoubtedly cause confusion and concern post-deal.  Ideally, the tech leader will adapt to new reporting and some storytelling, which can be evidenced through the board pack.

Like the previous example, far more customer engagement was necessary and toincrease levels of stakeholder engagement. There had been prior experiences where the business users rejected tech team initiatives, rendering the effort useless and expensive.

Lastly, they had to increase technology governance. Again, finding the right project manager and a fractional CTO was key to this.

Pace: I thought you did that already?

In this example, the deal went through nicely, even though I was personally overwhelmed by the amount of technology transformation needed to succeed.  But the investors saw an excellent opportunity and were willing to invest the money that was required to build the next platform of the future for the firm. 

At the first board meeting, the CTO realised the mood had changed; it wasn’t aggressive, but the board had expected him to be further on in his planning than he was.  Only three weeks in, and he was on the backfoot, needing to build a considerable strategy.  And as one investor told him – “I thought you had completed that already?”.  Being on the backfoot was incredibly difficult for him to recover from, which he did eventually.

3. Growth Capital to Fuel SaaS Transformation

Business Issue:

Pure software business.  Post-deal, long-running product transformation was preventing the latest updates from being presented/sold to customers. They had a large, expensive international developer team and the investors had doubts about the need for such a large team and its costs. 

There hadn’t been any prior technology due diligence – the customer base was significant players and the addressable market huge.

Cause

The management was very established and experienced but had been a private company and self-funded, so it hadn’t needed the same level of reporting it would for investors. 

This resulted in a lack of value attribution in the roadmap. Hence investors can see the money going out but not the benefit. The team already needed to move to a SaaS solution.

Technology In Use

High-profile, enterprise-focused web product where customers host themselves.  Large monolithic stack that had developed over a decade.

Processes

The large professional services team and this team significantly contributed to the overall revenues. Dependency on customers to host the product themselves, including the costs for underlying products such as SQL server (£££’ s). Competitors were providing a SaaS product with self-implementation options.

Team

Large, experienced, capable team.

Remedies

As the type of the company matures, the remedies become less drastic and more focused.

RecommendationsReasoning
Take the existing roadmap and initiatives and make them more investor-friendly. Especially taking the time to calculate and present the return on investment of tech initiatives.The team were doing a good job but hadn’t needed disciplined reporting.  Before investment, any spending was based on the co-founder’s gut feeling or customer feedback.   

With multiple product features and hundreds of developers, there needed to be more information available to all stakeholders to help them all buy in to change.

Strategy: Adapting the approach to technology

By now, you see the trend, regardless of the business size – there is a need to adapt the story (a.k.a. deck) for something more palatable and meaningful for the investor. We also helped them improve their approach to M&A of smaller software companies.

Pace: Get down in the Trenches

The team was already fast-paced and ‘investor friendly’ when making changes.  So they were less ‘vulnerable’ compared to the two other examples in this article.  But there were other concerns – inefficient teams and a lack of delegation under the bonnet. There were also problems from the team regarding agile practices and suppliers providing poor value for money.  Identifying these issues helped the team address them and increase the pace from within the trenches. They were making the team more economical and productive.

Conclusion

Regardless of the size of the business and technology maturity, many areas can be re-vitalised to help increase productivity and ultimately make the team more valuable to the business. 

A growth investment or management buyout is an excellent opportunity to review your technology team’s current strategy, pace and efficiency – and if you don’t get ahead of this, the investors will. 

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Hutton Henry
Hutton Henry
Hutton's technology industry experience spans Enterprise (Ford, HP etc.) to start-up ventures. 25-years post-merger technology integration experience, and small consultancy founder since 2010. He is currently the founder of Beyond M&A, where he has the privilege of working with VC and PE investors, translating how tech operates in their future investments and identifying additional value creation improvements.

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