An upper-middle market PE firm required expert insights into the Software Composition Analysis (SCA) sector, focusing on Application Security Testing (AST). They sought a senior advisor to analyze the market, competitors and product suite, guiding potential strategic acquisitions.
The Challenge
Deep Market Analysis within a Tight Timeframe
The PE firm needed a comprehensive market study of the application security space, specifically SCA. The challenge was to gain a detailed understanding of market segments, key players and competitors, with actionable insights on the target company’s position and growth opportunities.
How BluWave Helped
Connecting a Seasoned Expert in Application Security
BluWave responded by engaging a senior advisor with extensive experience in the AST space, including SCA. The advisor, having previously served as a VP of security strategy, possessed both technical acumen and strategic insights into the industry’s dynamics and key players.
The Result
Informed Decision-Making for Potential Acquisitions
The senior advisor delivered a comprehensive report within a 7-10 day sprint, providing a detailed analysis of the application security market. This report included breakdowns of the TAM, competitor analysis and strategic acquisition opportunities, equipping the PE firm with essential information to make informed investment decisions.
He reads everything you send to him; he’s very informed about the space – he was able to discuss things at a technical level and at an overall strategy level. He could tie the big picture to the technical details. He also had a great view on technical players. Best we have worked with so far in terms of senior advisors for diligence.
When a private equity firm is evaluating an acquisition target, they perform thorough due diligence before making any decisions.
One part of the due diligence process that tends to come later in the process is information technology (IT) due diligence. While important in any industry, this practice is particularly apropos for companies in the technology software industry.
“For companies that have kept up, they can have a significant competitive advantage,” BluWave Head of Technology Houston Slatton says. “But for companies that haven’t embraced technology or managed it well, it can become a liability or a risk to their operations.”
IT Due Diligence for Technology Software Companies
Here are how each of those steps could apply to due diligence being conducted on software companies:
Information Gathering
Gathering information is a rigorous process involving deep dives into the software’s architecture, databases and development practices. This phase assesses the company’s technical assets and the quality of its codebase, exploring aspects like scalability, maintainability and technical debt.
Asset Evaluation
In asset evaluation, the focus shifts to the software itself. What is the state of the product’s lifecycle? Are the technologies used up-to-date and supported? The evaluation also reviews the company’s intellectual property portfolio for patents, trademarks and copyrights that protect its innovations.
The contract review scrutinizes agreements with customers, vendors and partners. For software companies, this could involve licensing agreements, open-source software dependencies and third-party integrations that are essential for the company’s products and services.
Risk and Opportunity Identification
Identifying risks requires an understanding of the regulatory environment, especially for data privacy and security. What are the potential compliance liabilities? Conversely, where are the opportunities for innovation or market expansion? This step often reveals how IT can be a growth enabler or a liability.
“If you don’t use the tools well – if you don’t maintain them – a good IT diligence report is going to highlight those issues, but also will highlight those as recommendations or opportunities to drive value in the business post-close,” Slatton says.
The final recommendations are a strategic mix of immediate actions and long-term plans. For a technology software company, this might include advice on enhancing security, improving system integration or investing in new technologies to keep the company ahead of the curve.
The IT due diligence process is integral to understanding the true value of a technology software company. It’s not just about identifying what works and what doesn’t – it’s about uncovering how the technology can drive the company forward.
Private equity firms that don’t perform thorough IT due diligence may find themselves facing unforeseen challenges down the line. But those that prioritize this step can use it to guide their investment strategy, uncover new opportunities, and ultimately, ensure that their acquisition is set up for success in the rapidly evolving tech landscape.
For expert guidance through the IT due diligence process, reach out to BluWave. Our research and operations teams can connect you with the best IT due diligence experts in the industry, handpicked for your situation.
“The specialized providers in the Business Builders’ Network have in-house employees who focus on doing these types of assessments for investors,” Slatton says. “They’re seasoned technology professionals who know how to quickly assess an organization through the lens of private equity firms and other acquirers.”
Start a project with us today and we’ll provide a short list of service providers in less than 24 hours.
Multi-Site Roll-Up Strategy in Healthcare Services
A lower-middle market private equity firm, with a successful history in executing multi-site roll-up strategies, sought to delve into the healthcare services sector. Their vision was clear: identify a healthcare practice that resonates with their investment thesis, marking the inception of a broader roll-up strategy. The ideal acquisition would be a multi-doctor practice in the Midwest, South or Southeast, boasting more than $5 million in annual net collections and an entry EBITDA above $2 million.
The Challenge
Precise Buy-Side Search
The challenge was twofold: identifying a healthcare practice that not only met the stringent financial criteria but also aligned with the firm’s strategic vision for a multi-site roll-up. The firm sought a partner who would reinvest back into the business, ensuring a synergy that would fuel the envisioned growth and expansion. The search required a nuanced understanding of the healthcare services sector, coupled with a strategic approach to identify practices that resonated with the firm’s investment thesis.
How BluWave Helped
Facilitating a Connection Tailored to Strategic Success
BluWave utilized its extensive network to connect the firm with a specialized buy-side advisory firm. This partnership was instrumental in navigating the complexities of the search, leveraging deep industry experience and a nuanced understanding of the private equity landscape. The advisory firm’s strategic approach and geographical insights were pivotal in identifying healthcare practices that aligned with the firm’s vision and investment thesis.
The Result
Poised for Transformative Growth
Through the connection facilitated by BluWave, the firm was empowered to execute a strategic buy-side search that resonated with their investment thesis. This partnership has set the stage for the identification of promising healthcare practices, ready to be woven into a transformative multi-site roll-up strategy that echoes the firm’s vision of growth and success in the healthcare services sector.
This was a good firm to work with. They were organized and professional. We would recommend them to other clients.
Private equity firms face fierce competition for new deals. Even when the economy is strong, there could be dozens of groups vying for the same target.
When the deal market is stagnant, though, it can seem impossible to find a viable acquisition, let alone have the winning bid.
BluWave founder and CEO Sean Mooney encountered this challenge in his nearly 20 years in private equity.
“As the competitive tension of supply and demand intersected in private equity with more and more capital under management, chasing the same supply of deals was causing pressure for me to say, ‘I can’t just be a market taker anymore,’” Mooney recently shared. “’The surplus is being skimmed. I have to see something that no one else can see.’”
Mooney since started the Business Builders’ Network to help other leaders solve this very problem. He recently spoke with Andrew Joy, partner at Hidden Harbor, about how PE firms use specialized commercial due diligence providers to cut through the noise and rise above competitors.
So how do the world’s top private equity firms distinguish themselves in this cutthroat environment? One way is through commercial due diligence.
What is Specialized Commercial Due Diligence?
Specialized commercial due diligence can only be performed by firms that have deep experience in the target’s specific industry and are ready to go well below the surface to provide exclusive insights.
At a high level, a commercial due diligence project usually involves looking at a company’s market size, its total addressable market, conducting a competitive analysis and performing a voice of customer study.
“The goal of commercial due diligence is to validate the story that the target’s telling or to identify the reality of the marketplace out there so they can make an informed decision,” according to Don Jenkins*, the founding partner at one of the specialized diligence firms in the BluWave network.
While the details of the process are much more nuanced, a world-class CDD firm will be able to get up to speed faster, give private equity firms a deeper understanding of the business and equip them with a significant competitive advantage over other PE firms that conduct more general due diligence.
When PE firms consider buying a business, they aren’t just thinking about its present-day value. They’re also evaluating what an exit will look like and how much value they can create long-term once the company is no longer in their hands.
That’s why it’s so important for them to thoroughly investigate every potential target. Mooney said that PE firms have moved beyond a “trust but verify” mindset and are looking even longer term than they may have been a decade ago.
“You’re not building for the next five [years] because if nothing else, if you’re going to sell to the next person, there’s got to be some cream left to build it,” Mooney said. “If you’re only thinking three to five years ahead, you’re playing a chess versus checkers game.”
“As information and data have become more commoditized and more accessible, it’s becoming harder and harder to really find areas where you have a competitive advantage,” Joy said. “We like to say, ‘What’s our angle on this target or deal?’”
Mooney noted that investment banks do a great job exposing as much value creation as possible within a company. But PE firms that don’t dig deeper are going to be working from the same perspective as everyone else.
“The undifferentiated commercial diligence firm is calling the expert networks to get the insights about the markets that they’re sharing,” Mooney said. “Odds are if one over the other is not using a specialized group that sees something that the expert networks don’t, everyone’s getting beta. They’re spending hundreds of thousands of dollars on the sell-side study, which is calling two or three market network expert networks.”
Joy said that when PE firms use the same tools as everyone else, “that’s just the ante to get into the game.”
He added: “You really have to then figure out how this target or this opportunity fits within an angle that you can play. Whether that’s operationally, whether that’s commercially, so that you can justify to your committee why we think this asset is more valuable and we’re going to be the winning bid.”
When commercial due diligence is done right, private equity firms can make acquisitions with confidence.
“By the time we close on a transaction, we have a really strong hypothesis around what are the value-creation levers that we are going to pull over our whole period to create outsized market returns,” Joy said. “And that’s informed by the commercial due diligence.”
When Hidden Harbor is deciding on a target, Joy said they like to ask where the company’s right to win is, and how they can get there.
“It’s amazing to see sometimes and that when you do a full cycle of investment from closing to selling and you look back and you say, ‘What were the three biggest value-creation drivers of our return?’ And you’re able to say, those were the three that we identified in diligence. That’s pretty powerful to have that amount of conviction and be right about that and being validated.”
Each one has been vetted before joining the invite-only network and is re-vetted before they’re matched with private equity firms.
When you contact our research and operations team, they’ll connect you with a shortlist of service providers – with industry-relevant experience – in less than 24 hours.
Start your project today to get the differentiated insights that a specialized commercial due diligence provider can uncover.
*Privacy is important to us. While the source and company name have been changed, these are real quotations from a real service provider in the BluWave Business Builders’ Network.
