The IT Budget Challenge during Tech DD
The IT budget for Tech DD is typically submitted late in technology due diligence assessments. But once submitted, they can drastically change the observations, and conclusions, made.
Late submission results in last-minute follow-up interviews and requests for information. Sometimes having to inform both the investor and CEO that some further investigation is needed.
Of course, that can create unnecessary worries on both sides.
I believe a significant barrier to supplying this information on time is simply not knowing what to submit. Tech leadership can submit their current IT budget.
As the IT budget will be under scrutiny by outsiders, most leaders want to get it right.
Creating a delay.
Management is often fearful of the facts – perhaps they may highlight gaps in decision-making or the team.
The benefits of assessing the IT Budget for Tech DD
The main benefit of assessing the budget is getting mutual awareness pre-deal.
A few weeks of technology due diligence can highlight issues. You may re-evaluate your growth plan.
Tech leaders are too close to their businesses. They often operate in a bubble, and they can miss critical information that will change the perspective of a deal. Or a potential opportunity to change how IT works once the deal completes.
Better IT budget management assures fewer post-deal surprises. This paves the way for a much easier long-term relationship with your investor. A tech leader with a good grasp of their budget is seen more favourably.
Management tends to be fearful of the facts uncovered during the assessment. Yet the facts uncovered by the assessment are typically enablers. Such as ‘We’ve found problem X which needs to be addressed by Y, which will need time and resource”.
We often witness a sense of relief from management when they can openly raise a known tech issue. As it ensures the problem is properly resourced, potentially resolved and doesn’t bite them in the future.
To reach the dizzy heights of growth both parties seek, tech budgets need to increase, and hiring increase. So the last and most important benefit is sanity-checking the growth plan, and decision-making.
In addition to spending plans, the IT budget presents a narrative. This includes the overall plan, innovation and people needed to reach the agreed level of growth.
We will compare that narrative against the investor’s investment thesis. Then, we will demonstrate to you where things don’t appear to match.
We’re often asked how to present the IT budget for Tech DD.
The question can often cause embarrassment as people think they ‘should’ know what to submit.
The truth is, there is no exact way to present this information. But we need a minimum set of information to provide a rounded assessment. As highlighted here:
What goes into your IT budget for Tech DD?
The context of the IT budget assessment will differ depending on whether it’s buy-side or sell-side vendor technology due diligence.
- For Vendor DD, the forecast and resulting model will be completed in development with your M&A advisor.
- You’ll generally contact your internal finance team for buy-side Tech DD.
Following that, we broadly need the same evidence about the technology budget.
Evidence of the IT Budget for Tech DD
Below are the IT Budget evidence requirements for Tech DD. This list will provide your finance team with a brief explanation of what’s needed from their end and why:
|We need this from the investor to understand their perspective, particularly their view on how technology will either support or drive the growth plans.|
|Information Memorandum / Pitch Deck||We typically see an Information Memorandum for PE deals and Pitch Decks for VC. Both provide a narrative regarding the company’s history, present state and an optimistic view of the future.|
|Last 2+ Year Tech Spend, ideally budgets and actual||The primary investigation of the IT Budget beyond spend is what we will observe from decision-making. |
For instance, many Enterprise SaaS vendors have strong salespeople who sell ‘too much’ capacity or features which peak at the beginning of a relationship and adjust downwards.
And we want to see if those who learned through this process are still in the business as typically being burnt once they become a vital asset to the firm, ensuring it doesn’t overspend.
* Engineering spend, headcount numbers, salaries
* Product Management Cloud / Hosting Costs
* Back Office IT inc. Software, office connectivity
* R&D Product revenue and tech spend by-product (if split down this far)
|Following 12 months tech budget||We’re curious to match the spending with the resourcing plans and combined tech and product roadmap.|
|Forecast 3-5 year tech spend||We want to see how this longer-term forecast compares with the expectations of the tech team and if enough risk (e.g. vendor and wage inflation) has been factored in? We also want to marry up the narrative between management and the investor. In particular, the level of spending allocated for innovation versus the level of innovation promised in the pitch/IM.|
|Agreements||The importance of the small print here cannot be underestimated. When companies change hands, the novation terms can be particularly beneficial for software vendors with high fees – noting this is more a concern for bolt-ons or corporate M&A.|
* Documentation and details describe supplier/partner contracts and licencing * agreements.
* Any volumes / transactional-based agreements.
* Ownership and Intellectual Property.
* Opensource usage.
* Details of your usage terms with your clients for using your technology.
* Any other legal/contractual information of note. Escrow facilities etc.
|Overall financial model for the entire business, including the above||There’s typically a master model we’re given that has all of this in so we can relate tech to revenue and see spending in the context of the entire business.|
The technology budget is crucial to assess as part of your due diligence process. The documents suggested in this article are a good start.
They provide enough information to develop an informed opinion on the company’s technological plans. Which can help avoid costly mistakes down the line!
Often this exercise forces technology leadership to take a step back and work on the technology strategy. Restrategising typically results in additional funds to rectify issues.
Which is, of course, beneficial to both parties.