Making Smart Technology Decisions During the Private Equity Investment Period
For many companies entering into a partnership with a private equity investor, it is common to consider technology needs prior to and following the transaction. Will the existing technologies of the acquired company scale for planned growth? Are the right systems in place to provide the financial reporting required by a bank or a new private equity sponsor? How will financials be consolidated if businesses are merging?
As organizations begin to answer these questions, it is important to consider whether existing platforms are able to address future business needs. Many times, even if the business requirements support the need for technology investment, there may be resistance to take on the project due to projects costs and concern over the return on investment. When investors and companies evaluate these important projects and decisions, it is critical to consider the type of technology and investment that creates the most value for the business and how the project outcomes may influence the company’s valuation upon exit.
An ERP replacement, optimization, or rationalization project may be the right decision for companies looking to consolidate back office functions, leverage shared services, or optimize the operations.
To ERP or not to ERP?
When technology projects in the middle market are discussed, the conversation usually begins with the Enterprise Resource Planning (ERP) or general ledger system. Whether a company uses disparate systems across business units, unscalable systems like Quickbooks, runs the business with a legacy on-premise platform, or uses a homegrown solution, there is often a faction of decisionmakers calling to invest in a “real” ERP system. Since ERP replacements can be expensive and lengthy projects, it is important to understand the true needs of the post-transaction business. Companies should consider whether the current system can support the operational needs of the business and capture the right financial data. During this assessment, it is also helpful to look at the investment thesis to determine whether it includes cost synergies such as back office consolidation in functions like accounting, accounts receivable, accounts payable, and procurement.
An ERP replacement, optimization, or rationalization project may be the right decision for companies looking to consolidate back office functions, leverage shared services, or optimize the operations. Sometimes, concerns over the long-term viability or support requirements of the existing ERP may also be a mitigating factor. While ERP replacement projects can often be significant investments, modern cloud-based applications can make these transitions easier than in the past. Before deciding whether an ERP replacement project makes sense, companies should evaluate what the true business requirements are for that decision. Most importantly, once the decision has been made to evaluate software, companies must gather requirements across the organization to ensure that the software selected can scale with the business.
CPM: A different approach?
When considering technology investments, companies often find that their business needs do not require replacing or consolidating ERP systems. When evaluating requirements for system and process change, clients typically mention:
- Lack of data access and consistent reporting across the business
- Inability to produce management reporting to support decision making
- Concerns around managing decentralized close processes and creating consolidated financial reporting in acquisitive companies
- Inconsistent processes/systems for forecasting, budgeting and account reconciliation across geographies or business units (or acquired companies)
- Constant reconciliation between disparate systems and a lack of trust in the numbers
CPM solutions allow corporations to integrate data from multiple ERP systems (or other supporting data sources like HRIS and enterprise data warehouse), create a common chart of accounts, and perform complex financial consolidation.
Often, in platform rollup strategies, sponsors and management decide to allow add-on business units to operate somewhat independently. There is not always an operational need to consolidate these businesses and subledger data like customers, vendors, and invoices into a single system. More often, the driving requirements are around consolidated reporting, which is commonly addressed through Corporate Performance Management (CPM) tools. CPM software is designed to be used primarily by accounting and finance organizations and to support business activities such as financial close, consolidation, account reconciliation, and budgeting/forecasting.
CPM solutions allow corporations to integrate data from multiple ERP systems (or other supporting data sources like HRIS and enterprise data warehouse), create a common chart of accounts, and perform complex financial consolidation. This allows for a single source of financial truth and creates a scalable platform from which finance and accounting activities like budgeting/forecasting and account reconciliation can be performed using a common data set. In addition, these tools provide workflow, allowing for visibility into the close process as well as common reporting elements that can be used throughout the organization. Similar to ERP software, when evaluating CPM tools, companies should define and gather organizational requirements before making any software decisions.
Creating enterprise value
Sponsors and management teams may resist transformative technology projects, especially late in an investment cycle. Hard-cost ROI justification can be difficult to illustrate in the short term, especially if headcount reduction is not part of the business case. In many cases, however, value is created through these types of projects prior to exit, when executed properly. Companies that are organized, have consistent data across business units and have informed and confident management teams are generally the most attractive to buyers.
With disparate systems and manual reporting during sell side processes, there is often significantly increased transaction costs and timelines due to the inefficiency in preparing consolidated quality of earnings and conducting due diligence. Management teams and third-party providers often experience difficulty rolling adjustments through periods or across business units and tracking extraordinary items. Additionally, management teams may be slower to respond to due diligence requests and potential buyer may have concerns related to audit deficiencies or weaknesses
Transformative technology projects can not only help companies become more integrated but can also increase management confidence in reported numbers and help prepare for the sell process. When done right, implementation of a new ERP or CPM system can guide organizations through the process of defining the best way to report on their business, cleanse historical data across disparate systems, and help to mature the organization. The value of these transformative projects and organizational improvements are often realized as a higher multiple on a transaction and can yield significant ROI for investors.