The second is "economies of scope" - cross-selling

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When buying an IT business, three types of operational synergies are often calculated. The first is "economies of scale" - it reduces costs per unit of production. For example, a business has a core product, its functionality is to be expanded by implementing AI, but there is no expertise. The team of the asset acquired through M&A, with various IT competencies, including AI, will work on a new AI-based service and strengthen the team of the current product line. As a result, a new product will appear, and the current one will increase revenue (due to volume growth). At the same time, specific HR costs are reduced.

of IT services by "exchanging" client bulgaria whatsapp number database bases. Savings are achieved by reducing the costs of attracting clients to current and acquired services.

The third is “time-to-market” – accelerating the launch of a new product or expanded functionality of a current service.

By adding the sum of synergies to the fair value of the business, the buyer obtains the maximum (investment) valuation for it. The potential for added value is embedded in the difference between the investment valuation and the fair value.

If the buyer has miscalculated the synergies, the sum of the synergies will be wrong. This is the key factor in the loss of its shareholders.

Due diligence errors
There is also an "expense" part, which reduces the amount of synergies. The buyer needs to understand the key historical risks of the acquired business and their value. For this purpose, a comprehensive business audit is carried out before the transaction.

When purchasing an IT business, the following checks are especially important:

1. Technical. Defines cyber threats, the technology stack of the acquired business, its IT infrastructure, potential for scaling, the business's dependence on the seller's IT services, the need to transfer them to the buyer's circuit and install other services. The main thing here for creating value is to develop a roadmap for seamless integration of the asset with the acquirer's IT systems.

2. Tax. In addition to "standard" risks, it identifies risks of business fragmentation. The practices of using IT benefits are not always optimal. Often, businesses seek to extend their validity, despite the risks. The buyer should not groundlessly include the "status quo" for IT benefits in the financial model when calculating the investment valuation of the company.

3. Financial. Determines the key financial metrics of the acquired business and its growth drivers. If the business has reached the EBITDA indicator, you need to check its current calculation and then adjust it based on normalized reporting. If this is an early-stage company, check the revenue calculation and determine the growth rate. If the asset is a marketplace, check its specific metrics (GMV, transaction fees, etc.). It is also necessary to assess the risks of bankruptcy and insolvency.

4. Legal. Identifies key legal risks. It is important to at least check the rights to the title of the company's shares/participants and all its key assets (software, data sets, infrastructure), the design of the team and client base.

The risks must be digitized. Then, depending on the negotiating power, the buyer:

1) subtracts them from the price,

2) "shares" them with the seller,

3) accepts.

The latter means a loss of transaction value.

The sum of the risks is usually less than the value of the synergies. But sometimes the risks jeopardize the entire deal. For example, if there are unavoidable legal risks on the rights to critical software in the product IT business.

If risks materialize in the future but have not been identified, shared with the seller, or priced in, they will reduce the buyer's gain from the transaction.

Weak negotiations