The leadership risk hidden in technology acquisitions
In a technology deal, much of what is being bought leaves the building every evening. The investment committee meets the chief executive and the finance director; the value often sits two levels below them.
Financial, legal and commercial due diligence will tell an investor a great deal about a technology services or software business: revenue quality, contracts, margins, the pipeline. What they rarely tell the investor is which people that revenue depends on, and whether those people will still be there, and still motivated, eighteen months after closing.
Where the value actually sits
In firms that sell expertise, value is concentrated in a small number of roles that seldom appear in the management presentation: the practice leaders who own the largest client relationships, the architects who understand the platform, the delivery managers who know how the work really gets done. Clients often buy from a person rather than from a logo. Know-how lives in heads more than in documentation.
All of this sits outside the organisation chart. A chart shows who reports to whom; the question is who the business depends on.
Why the usual process misses it
Due diligence is run against the clock, through the top team. The people who present the business are the people whose incentives are being negotiated. Retention packages are designed for the five or six names on the term sheet. The second line is met, if at all, after signing.
In our experience of an acquisition programme across four jurisdictions, the departures that hurt most were rarely the ones anyone discussed at signing. They tend to come later, when an earn-out ends, a role is redefined in the integration, or a respected leader finds that decisions are now taken somewhere else.
Four questions before signing
- If ten people left in the first year, which ten would change the investment case?
- Who holds the relationship with each of the largest clients, and does the client know anyone else?
- Is the know-how in the people or in the firm: documented methods, a second line able to deliver, tools that outlast any one person?
- How will the integration change their authority, their career and their reward, and who will tell them, and when?
What to do with the answers
The answers are a reason to price, structure and plan differently, rather than to walk away. Retention arrangements can reach beyond the top team and be agreed before signing. Deputies can be named for the roles that matter most. The first hundred days can be sequenced so that the people who carry the value hear about their future from the new owner before they hear rumours.
An investment committee that can answer one plain question, whom exactly are we buying, has done most of the work. In technology, that question deserves the same rigour as the numbers.