Middle market private equity investment activity continues to heat up, and there is a heightened sense of urgency to complete deals ahead of anticipated tax policy changes. Whether you are a PE buyer or seller, time delays can make or break any M&A transaction and success often depends on speed and data quality.
Decision-making is only as sound as the data that supports it, yet organizations often don’t fully appreciate how proper data management can drive business outcomes and smooth due diligence efforts. Poor data quality is one of the common reasons why business initiatives fail, which explains why PE buyers are more likely to invest in data-driven businesses that demonstrate they care about quality.
Don’t let poor data quality delay your exit strategy
In private equity, the due diligence phase of the transaction timeline is critical and poor-quality data can hinder the closing process. Yet, more often than not, PE firms make the mistake of ignoring data management until they plan the exit strategy, at which point it is too late. The result? PE firms and portfolio company management teams have to spend countless hours manually addressing data quality issues.
“When conducting IT due diligence, private equity deal teams tend to ignore the ‘I’ and focus on the ‘T,’ which sets them up for acquiring portfolio companies with poor data quality,” says Faisal Muhammed, technology consultant for RSM US LLP, who provides data and analytics services for clients.
During his experience working with PE firms, Muhammed has observed that most deal teams will postpone fixing data quality issues at the portfolio level until they are ready with the portfolio company’s exit plan; this can lead to costly delays. He recalls compiling sell-side analytics for a PE-backed client with poor-quality customer data. When it came down to crunch time, the buyer asked to see sales and profitability by various customer attributes (e.g., industry; original equipment manufacturer vs. maintenance, repair, and overhaul), but the seller was unable to deliver. This delayed closing by more than a week, during which time the client spent money and internal resources to update missing customer attributes. Fortunately, the lack of quality data did not tank the deal, but it did cause considerable discomfort during the delay.
“If your goal is to increase investor interest and drive higher valuation multiples, you want to focus on high-quality data that eliminates uncertainty and directs the focus on the strength of the business and value creation opportunities,” says Muhammed.