How Technology Due Diligence Strengthens the Investment Thesis

Technology Beyond Risk: Focus on Value Creation

In many M&A deals, technology due diligence ends with a reassuring conclusion: the platform is stable, the systems work, and the risks are considered manageable. However, a positive technology assessment does not answer investors' main question: Can the company's technology, digital capabilities, and AI readiness sustain the growth, margin expansion, and value creation envisioned in the investment thesis?

The value of a company is not only built by the technology it has today, but also by the commercial, operational, and financial results that this technology is capable of generating. Therefore, buyers need to evaluate technology as a strategic driver of value, capable of testing the thesis of the transaction, identifying opportunities for value creation, and strengthening conviction about the investment.

Building this conviction requires evidence-based confidence that the investment thesis is viable. This requires a clear vision of whether the business has sufficient technology, digital capabilities, data assets, operating model, talent, and ability to execute to achieve the projected results, as well as assessing whether the necessary investments are reflected in the transaction model.

Issues frequently analyzed in this process include:

• Is the company able to meet revenue growth targets and sustain its competitive advantage?
• Are you able to expand margins without compromising service levels or customer experience?
• Can you grow without increasing costs in the same proportion?
• Can you execute the product roadmap needed to sustain the anticipated growth?
• Can digital capabilities and artificial intelligence enhance business and operational decision-making and drive measurable value?
• Can the business adapt to technological changes and new customer expectations?
• Does the management have the capacity to implement the necessary changes within the investment deadline and the planned budget?
• Will these capabilities strengthen the company's strategic positioning and value in an eventual exit from the investment?

Stable Technology Doesn't Always Mean Ability to Scale

A technology may perform well today and still not be able to sustain growth in the long term. In practice, this can mean:

• An application environment that functions properly, but lacks the integration and data needed to automate operations;
• A platform that operates reliably at current volumes but requires significant investments to support projected growth;
• A technically sound software product, but inserted in an organization without the ability to execute the roadmap envisioned in the revenue plan;
• A company that has large volumes of data, but lacks the quality, governance, and operational discipline needed to use it efficiently.

These issues rarely appear as material due diligence findings. They typically arise later, when the technology is evaluated against the results that buyers expect the company to deliver, even when there are protective mechanisms in place in the transaction.

Representations and Warranties Insurance may protect against specific breaches of the seller's representations, but it does not protect EBITDA assumptions, growth targets, or value creation plans.

Case Study: When an Approved Technology Concealed an Opportunity

During due diligence, a private equity investor evaluating a mid-sized manufacturer of metals and bathroom fixtures did not identify any relevant technological concerns.

However, sales representatives did not have real-time access to inventory and production information. As a result, when an ordered product was not available, they were unable to suggest alternatives to customers, who frequently canceled their orders.

By making this information and alternative product recommendations available to sellers, the buyer has identified a potential opportunity for EBITDA improvement.

Technology needs to be evaluated in relation to the investment thesis

Most investment theses rely on technology, even when it is not explicitly identified as a core element of the transaction.

However, this question cannot be answered by analyzing technology in isolation. It requires an integrated view of the business, operational, financial, and technological aspects of the business.

Integrated due diligence is important, but bringing together multiple work fronts does not, by itself, generate conviction about the investment. For example, a commercial team can identify an opportunity to increase customer retention.

The technology question is whether the company has the data, digital channels, and decision-making tools necessary to act on this opportunity. The operational question is whether the organization can meet the resulting demand.

The financial issue is to verify that the benefit generated in revenue and the necessary investment produce an attractive return. These aspects should be analyzed as different dimensions of the same value creation thesis, and not as independent issues within due diligence.

Value Engineering Connects Technology to Business Outcomes

Value engineering is the process of identifying and quantifying the value generated by technology capable of delivering the commercial, operational, and financial results predicted in the investment thesis.

This approach connects technology capabilities to their impact on EBITDA and starts from the buyer's definition of the business outcomes they want to achieve and how technology can contribute to them.

Buyers need this perspective during due diligence, when they assess whether the value creation plan is truly feasible and what will be required to execute it. This approach helps distinguish opportunities that can be implemented in a practical way during the investment period from those that will require more time, capital, or organizational changes. The priorities identified in this process can then guide the execution plan after the transaction closes.

Putting value engineering into practice

Value engineering requires determining what is feasible for the business, quantifying the value, and developing an executable plan with clear responsibilities, defined sequencing, and measurable results," said Kakar.

The art of the possible

The first step to a value engineering approach to technology due diligence is to understand what technology, digital capabilities, data, and artificial intelligence can enable. This requires knowledge of the industry, customers, operating model, and relevant technology developments.

The assessment should identify where the business can operate differently, where decisions can be improved, and where digital capabilities can create new sources of

growth or efficiency. This process helps the buyer identify value-generating opportunities that may not be visible when due diligence is limited to the existing technological environment.

Pragmatic results

The second step determines which opportunities are viable for the company within the proposed ownership model and during the investment period. The opportunity should be grounded in the company's current level of maturity, available data, management capacity, existing technology base, capital needs, and the organization's ability to absorb change.

A pragmatic approach to value engineering transforms ideas into specific opportunities, each backed by investment requirements, schedule, dependencies, risks, and expected benefits for the business.

Precise execution

The final step of value engineering is to turn the identified opportunities into an executable plan. This plan should define what needs to happen before the transaction closes, the requirements for Day 1, what initiatives should be initiated in the first 100 days, and how the broader transformation should be sequenced.

The plan should identify those responsible, funding needs, operational dependencies, decision points, and measurable outcomes. It should also recognize that value creation is not the sole responsibility of the technology area.

A New Mandate for Technology M&A

Risk assessment will remain a core element of traditional technology due diligence, as a value creation plan cannot be built on an insecure foundation. However, it also represents an opportunity to strengthen investment conviction by connecting the investment thesis to the company's business, operational, financial, and technological environments.

To assess whether the technology is capable of sustaining the value creation plan, the transaction teams need the financial, commercial, operational and technology areas to work from the same assumptions.

Together, they can identify what the technology is capable of improving, determine what is feasible for the business to achieve and execute, and quantify the potential impact on different areas of the organization.

“Technology M&A needs move from assessing risk to addressing how technology, digital capabilities and AI can help build a more valuable business than the one being acquired. A clean technology report helps close the deal. But from there, connected thinking builds

conviction in the deal thesis, and value engineering turns that conviction into measurable results.”, TK Kakar, sócio de Technology M&A, Grant Thornton.