Deal Breakers: Can Technology Help or Hurt Your Valuation?

  • Robert Tymowski
  • jan. 2018
  • Media & Technology
  • M&A: Buy-Side
  • M&A: Sell-Side

In 1995, Jeff Bezos launched Amazon as an online bookstore. 22 years later, brick-and-mortar bookstores are all-but extinct, and Amazon has become an e-commerce giant that sells more than 400 million products, including electronics, digital music, home & kitchen, books, automotive parts & accessories, sports & outdoors, industrial & scientific, computers, collectibles & fine arts, and tools & home improvement.

In little more than two decades, Amazon has totally and completely disrupted the consumer retail (and now grocery!) industry on a global basis.

Technology is ever-evolving and unceasing. According to the 30-Year Cycle theory, new technology innovations completely disrupt the marketplace – you guessed it – every 30 years. As examples, the telegraph was invented in 1845 and rendered obsolete in 1875 with the introduction of the telephone; radio’s popularity launched in 1905, only to be usurped by television in the 1930’s. The early 1990’s ushered in the biggest disruptor of all, the internet… we’re due for the next cycle.

Disruptive technologies have extraordinary ability to erode value in the context of selling a business. Unaware business owners, unwilling or unable to respond to these threats, often find themselves facing declining company performance with no easy solution to reverse the trend.

While most Deal Breakers posts address issues encountered during confirmatory diligence, this one deals with a risk that can be identified and addressed at any time. For this fifth Deal Breakers post, we’ll cover the impact technology shifts can have on M&A transactions and what business owners can do to protect themselves.

Commonly Encountered Technology-related Disruption Issues
Most (all?) day-to-day technologies used today will eventually be obsolete; some sooner than others. Technological advances, and subsequent disruption, can be irreparably problematic for businesses that fail to adapt.

Changes in technology have the potential to negatively impact the fortunes of a company in three ways:

  • Adopting technology before it’s ready for broad-scale use can lead to costly and potentially reputation-damaging failure. Owners who find themselves in this predicament end up getting negatively impacted twice: once for the cost of the investment itself, and again for the resulting degradation of business performance.
  • Postponing technology adoption can result in competitive disadvantage relative to forward-looking industry peers. Failing to appropriately keep up with other parties in the space can lead to competitive disadvantages, such as higher lead times, a higher cost structure, or an inferior product or service.
  • In extreme cases, failing to identify business-model-killing new technology can result in product and/or service obsolescence (e.g., photofinishing, DVD renting, and typewriter manufacturing). In some cases, business performance degrades over time in a “long kiss goodnight” (e.g., printed news media and taxi cab services). In others, the change happens almost overnight (e.g., the light bulb replacing candles as the best way to illuminate a room).

Time and circumstances are often all that separate these three potential pitfalls. But how does the average small business owner keep up with new technologies?

Countermeasure: Improvise, Adapt, and Overcome
According to Forrester Research, the average business hasn’t made significant technology upgrades in five years. The gap between yesterday’s “horse buggy” and tomorrow’s “driverless car” widens every day. Importantly, businesses equipped with the technology infrastructure to compete at an optimal level within their industry attract higher valuations when it comes time to sell.

When making decisions related to technology, each business owner should consider the following:

  • Are the products or services I provide at risk of obsolescence? If yes, from what, is there anything I can do about it, and how much time do I have to decide what to do?
  • If my business doesn’t already invest in research & development, should it? If it does, should more funds be allocated to this effort?
  • What are other competitors investing in, and why?
  • From an operational perspective, what am I doing to ensure my business doesn’t “fall behind”?
  • Is the latest technology a “fad”, or will it revolutionize the industry my business competes in?
  • When is the right time to make a technology investment?
  • Am I willing to invest the necessary capital to “keep up”?

Proactively considering the answers to these questions can be the difference between industry leadership, profitable growth, and diminishing performance.

The pace of technology innovation and evolution is increasing at an exponential rate; the speed of this change can be an asset or a handicap. Each company’s ability to stay informed and abreast of emerging trends will in part determine its ability to compete and stay relevant. Challenges (i.e., disruptions) and opportunities (i.e., innovations) presented by new technologies are “two sides of the same coin”, both of which must be closely and proactively managed by business owners.

Successfully navigating technology-related issues requires a long-term strategy flexible enough to take advantage of unforeseen developments, but stable enough to ensure the company’s day-to-day operations and security. For those unwilling or unable to address these challenges, it may be time to call an investment banker.

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