From The Due Diligence Show (Episode 8), HR Alert!! One thing that we love to investigate as part of technical due diligence is organizational structure, teams, and people.  This is an area that contains significant value as part of a technical asset, as well as a substantial amount of risk to ensure a productive future of the potential acquisition. The Thought Source team discuss all of the areas that are usually investigated, from key product contributors, forecasted investment in people for success, integration considerations, office sprawl and more. Are the key contributors still employed?  Is the success of a product reliant on one or two people?  Can the team scale to meet your deal thesis? We tell you how we find the answers during technical due diligence

Luke Silcock: Organizational factors are critical to look at as part of your diligence. We’re looking at how the organization is set up , how it runs, what makes it tick, and we’re assessing that. Obviously, it’s only got its history, but we’re also trying to project forward. How do these risk factors play out for the acquirer? Is this a team that’s going to be able to get on with the rest of your company? Are they going to be able to cope with the process disciplines that you might require? And can they succeed? And we’re going to be looking at are the key contributors that are identified through the software engineering review that Andrew talked about before.

Andrew Borzycki: This is one of the interesting things about the technology due diligence. We tend to be one of the few teams that actually goes out and spends a lot of time with the people, instead of purely focusing on what’s going on in data rooms. We get to talk to the people, get to know them, and in combination with the quantitative analysis, we get through things like contributor history. We’re able to work out who the true key people are in the organization. And that may or may not line up with what you think. You may have someone who’s the key developer or engineer or brains trust behind the company, but they may not be a very talkative person. If you’re purely focused on PowerPoints and who gives the best presentation, they’re not going to pop up.

Luke Silcock: And then if you have product development goals, they might land on the shoulders of this one individual who’s identified. They’re going to need to make a personal transition as they come across as part of the transaction. You might be able to get a targeted retention bonus.

Andrew Borzycki: Knowing who the key people are, also lets you work out how you want to do those retentions with a lot more precision than if you just have a blanket rule. This way you can really target who’s important. And then, especially if budgets are tight, you can really focus it that way. This is a pretty big life event for these key people. You want to make sure are they actually willing to go along, because that’s going to affect the dynamics of how successful this deal is going to be. You’re asking this person to maybe move halfway across town, or you asked them to move halfway across the world. Are they going to be happy with this? This is all the sort of stuff you need to formulate with as you’re actually working through your deal.

Luke Silcock: One of the things I find when interviewing and having presentations delivered is when there’s passion. I love gauging the engagement levels and the passion, particularly when we are, say, talking through the customer support organization. Who are the customers? Do they care about them? How do they respond to incidents and issues that have been raised by the customer and how do they get the product updates out there? When they’re being communicated in the process of a diligence, that can be really insightful.

Andrew Borzycki: Absolutely. And bringing all of these together, the word that keeps it all together his culture. You want to make sure that you’ve got a culture that’s compatible with your company, and this is a good way to help check that out. And whether these are going to mesh together. You are going to be the one company so you need to know all of these things.

Luke Silcock: Now, before we move on, what about services? Because sometimes, it’s not just about the tech, not just about the product. The company is delivering services as well.

Andrew Borzycki: The people dimension is magnified even more. While you may be delivering technology oriented services, if you have a services organization, everything we have just said applies more because in a services organization, the people are the product, so to speak.

Adam Jaques: One of the parts of advice that we give to our clients is around integrating teams and companies into theirs, and how the organization should fit. I think that’s an important thing, because a lot of the time there will be a technology organization that may end up needing to be split a little bit whether it’s an R&D function versus support versus custom engineering. All those sorts of things need to get moved into a parent company that may have a different layout and that that needs to be assessed. And really back your go to green. How can we estimate what expense is there? And what is the remediation that’s required? It comes down to how should we build this team? How can they plan for the next year or two and, and the fact that they’re probably going to need to spend more money on people than then they have in the past.

Luke Silcock: What we’re trying to gauge is can these people continue to contribute in these ways? We then factor in where they might have made it a certain way but are they going to make that next step? And this requires thought. In jargon terms, it’s the total cost of acquisition. When we’re trying to calculate the total cost of acquisition, we’re trying to work out where extra roles are needed, and what are the total costs that need to be factored in, alongside the purchase price for the company to make it a success.

Andrew Borzycki: Is this almost like when you we’re going back to our house analogy? You’ve gone and bought yourself a house, but you need to spend all this money on renovations to make it liveable?

Adam Jaques: Yes. Part of the interesting work that we get to do is we meet a lot of the folks that are doing the work, that are running teams, that are working within teams, that are some of the stars as you mentioned that have been big contributors to the product. And we can give a really good assessment of the personalities of those folks as well because we meet with them, we work with them. And to be honest, sometimes that becomes a pro or a con. Sometimes it can become a remediation issue where, there might be a team and we’ve seen this before where it’s been a large R&D organization. Several teams split up and one of the teams has been kept separate because they’re totally, just hard to work with. That’s the sort of sort of stuff that we need to also bring to the surface.

Luke Silcock: There are the cultural factors, the organizational DNA, but then there’s this sensitive topic of EOL, or the end of life of the existing product. There’s the company that’s being acquired. What happens to their existing products and what happens to their customers? They may need to be disrupted. What impact might that have? What might that do to revenue? And what might it do to morale? If the company in its growth stage has basically sold these clients on a promise, they’ll feel honour bound to keep those customers over time.

Adam Jaques: It’s a reality that that can go a couple of different directions. Sometimes a company is acquired based on the fact that it is a floundering product and will get absorbed as a technology and that’s sort of an understanding. However, a lot of the time, I’d say more than majority of the time, there is a plan put forward where that existing team can be brought in for a cross pollination of ideas of the IP. There’ll be a very structured EOL, end of life process that’s put in place to wind down customers off a platform and usually bring them up on a replacement platform. This is the more dominant buyer’s platform where they’re supported. Typically messaging is done around the areas of support, being a global organization, very strong in comparison to perhaps what they’ve experienced in the past.



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