Six Ways Technology Due Diligence Failure Can Kill Your Private Equity Investment

Six Ways Technology Due Diligence Failure Can Kill Your Private Equity Investment

No matter what market you’re in, technology is a significant element of your business. Taxi companies learned this when Uber and Lyft employed sophisticated apps to topple their industry. Prior to the emergence of those two frame-breaking enterprises, few in the taxi industry would have considered themselves in the technology business.

Even a high-touch industry, like autism services, invests significant intellectual and monetary resources into computers, databases, practice management, and other critical technology.

These systems and the people who run them are often overlooked when investors conduct due diligence before acquiring autism businesses. But they do so at considerable risk.

A 2007 study at the University of Virginia found that two-thirds of mergers and acquisitions fail to deliver their expected returns. More recent research (2016, 2017) shows this number as ranging between 50 and 85 percent. Much of this is due to poor integration of cultures and business practices. A significant piece of this is systems and technology.

In my work with private equity firms, I frequently encounter this problem. Investors acquire platform companies comprising multiple businesses that have been acquired and consolidated in a relatively short period of time. Frequently, each of the businesses within this platform is using different software for data collection, analytics and practice management. Often, it’s chaos for the employees who are charged with integrating new acquisitions into the company. Combine that with the growing failure to conduct substantial technology due diligence and what we’re left with are investors putting their investments at needless risk.

Compromised Systems

No investor wants to purchase a company whose data has already been stolen. Consequently, it is critical to investigate the security of a target company’s data before investing. Due diligence investigations of Yahoo’s data systems saved Verizon $350 million. After discovering all three billion Yahoo email accounts had been hacked, Verizon slashed its $4.48 billion offer to cover the cost of remediation. Absent due diligence, Verizon would have paid for the email accounts and then found itself liable for the problem. Conversely, Marriott purchased Starwood and discovered a massive data breach in the reservation system that resulted in the hacking of personal data, including passport numbers, for millions of customers. Marriott failed to conduct proper due diligence during the transaction and has since incurred many millions of dollars in expenses to remedy these issues.

IT Integration

When two enterprises merge, the major concern is the integration of two distinct organizations. Most merging entities recognize the challenge of combining physical, cultural and operational systems, but often neglect or miscalculate the complexity of the required integration of IT. In my experience, the reliance on synergies and applicability of existing systems is generally overestimated; as a consequence, the cost to merge IT systems is generally underestimated. Most organizations are struggling just to integrate and optimize their own systems and would be severely challenged to assimilate a new one or to migrate the entire company to the best option available.

IT Staff Considerations

Put yourself in the shoes of your employees. An imminent merger or acquisition threatens their continued employment. Destroying documentation; changing protocols, passwords, etc.; and installing obsolescence into IT systems are just three strategies to create a level of indispensability that would protect their job or cause damage to the business once they are let go.

It’s important to remember that the overwhelming majority of people would never consider such actions. But it only takes one bad actor to wreak havoc for a company. Those closest to and with the deepest knowledge of the technology, software, systems, and processes that keep the company running smoothly are the ones with the greatest potential to do major damage. There are numerous accounts of these events in mergers and acquisitions. Companies can protect themselves: there are defense mechanisms against this kind of behavior that are the purview of IT experts.

The Leakage of Intellectual Property

Bearing in mind the same caveats about human nature, employees have been known to steal information. Not just a priority when selling the business, protecting intellectual property must be a core due diligence practice at all times. In one of my own businesses, an employee downloaded critical business information and intellectual property and used it to establish their own company, now worth a significant amount of money. During acquisition discussions, determining who is most likely to feel their job is in jeopardy can lead to defensive measures that protect intellectual property prior to completion of the purchase as well as throughout the lifespan of the business.

Social Engineering Hacks

While these sorts of attacks are an ever-present threat to businesses, smart criminals know that companies are especially vulnerable at times of sales or acquisitions and can exploit the situation to steal money. In a growing wave of cyber theft, we are seeing increasing incidents of thieves hacking into company email and sending requests for payments that go directly to an offshore account. Staff, aware that a transaction is imminent, comply with the request and suddenly large sums of money are gone. A client of mine avoided this scam only because the accounting employee questioned the CEO in person about transferring funds by wire. This is the exception that proves the rule. Oftentimes, transactions like this, that get easily flagged in the normal course of business are processed without hesitation during a sale because atypical financial transactions are commonplace during these periods.

Email Trading

The final vulnerability to look for is relevant to publicly traded companies. Before a deal is ever announced, there will be rumors circulating about the sale. More dangerously, there will be ongoing chatter between business leaders that reveals sensitive information, most especially a possible sell date.

While rare, it’s not unheard of for opportunistic employees who know their way around the company’s systems to gain access to email communications and begin monitoring leadership’s emails throughout the ensuing weeks and months to parse them for valuable details that they then use to make personally advantageous stock trades with should-be confidential insider information. Many young IT professionals have been arrested for this kind of breach.

The positive thing to keep in mind here is that these attacks are avoidable. Managers that get caught in this trap are usually using an unsecured email server like Gmail, to which some employees have full admin access. Companies in the midst of a sale or acquisition cannot afford to be naive about access to information. An added emphasis on private communication and enhanced security provisions around sale preparations can easily remedy this kind of vulnerability.

Understanding these six elements of due diligence facilitates a process of digital risk mitigation that can save investors millions of dollars and secure the viability of entities, in our industry, that provide critical services to a population in serious need.

The Opportunities for Investors in Autism Services

The Opportunities for Investors in Autism Services

By Ronit Molko, Ph.D., BCBA-D

The landscape for investment opportunities in autism services is growing and changing at a dizzying pace. As the diagnosis rate of children identified with autism spectrum disorder approaches 2.5 percent—nearly tripling since 2002—the demand for services is mushrooming.

The marketplace is also beginning to demand more sophisticated models of care and opportunities for autistic individuals. There have been multiple recent acquisitions of autism service providers and the land grab continues.

Considered the gold standard for autism treatment modalities, reimbursement for ABA is now mandated in 46 states, twice as many as in 2010. ABA is a scientifically-validated approach that encourages family involvement in treatment. ABA focuses on techniques that bring about positive changes in behavior, particularly in improving individuals’ abilities to care for themselves.

Recent acquisitions—including FFL’s investment in ALP, Blackstone’s investment in CARD, TA’s investment in BHW, and many others—illustrate the intense, continued interest in this sector. Although valuations are high and questions persist about the quality of management at many providers, other large investors are reported to be shaking the trees, searching for the best point of entry into the industry.

The investment space is not yet mature, making this the time to get in. Industry leaders are just now beginning to recognize the need for standardized outcome measurements that reflect the actual experiences of autistic children as they grow into adults.

Autism services offer investors interested in social impact a financially profitable opportunity. The autism services industry is badly fragmented, typically characterized by well-intentioned, clinically-focused, but inefficient businesses lacking the ability to attract top staff or scale and manage growth. It is primed for savvy-but-conscientious investors who can improve outcomes while generating a financial return on investment.

The combination of good business practices, shrewd servant leadership and focus on clinical outcomes can improve both the bottom line and the lives of people with autism spectrum disorder.

The autism services industry is ready to reward investors who bring those three together, which is why we’re already seeing the leading edge develop in a big way.

investment

A Social Impact Through Investment in Autism Services  

An imperative for many investors today is to do good as they do well. Socially conscious investment is fueling many sectors of the economy, from alternative energy to continuum of care communities by combining the best of the head and the heart. Savvy investors provide their business acumen and management expertise to help these industries prosper.

Investing in autism services offers a tremendous opportunity to earn a significant return on investment, both financially and socially. There is a global need for autism services that is growing rapidly and has the potential to transform people’s lives. Socially conscious investors will find an industry that is not well-understood or capitalized and is ripe for new, more collaborative business approaches.

I believe that autism services are ripe for behavioral healthcare companies that have a heart for helping and the entrepreneurial spirit that drives business innovation.

The autism services sector needs more of these investors and the clients of these services would benefit from improved business practices in the field. More investment will create more trained professionals and increase the number of service providers. More providers will be able to help more individuals and better prepare more schools to work with children with autism.

 

The Need for Standardized Outcomes
A critical need in autism services is for standardization in measurement across the industry. Currently, data collection and analysis is random and inconsistent, and outcomes are starting to be defined by insurance companies rather than by clinicians. This is a dangerous path that does not bode well for clients of autism services.

If instead, new investors brought additional resources and their sophisticated business minds to the sector, they could professionalize its business practices. Almost certainly this would include development of standardized outcome measurements across the industry. In this way, greater capital investment can change the entire landscape for individuals living with autism and their families.

 

Profit and Care Can Live in Harmony
There are those who believe that the rush for profits is incompatible with compassionate patient care. In practice, there are certainly those organizations that have lost sight of the delicate balance in a greedy headlong rush. But the reverse is a problem too: any company that fails to apply the best business practices will either cease to exist or limp along providing second rate services to their clients.

The free marketplace is an adept Darwinist, dispatching those outfits that fail to keep up with business innovations and punishing those that provide poor customer service.

Enlightened self-interest is another driver of wise investment in autism services. The autism diagnosis has exploded in the last couple of decades – one in 59 children born today is diagnosed along the spectrum – and the cost to society to support an autistic individual across their lifetime is somewhere in the vicinity of $2-3 million. A 2014 study found the total cost of autism in the U.S. alone is roughly a quarter of a trillion dollars. This burden is borne by each of us.

 

As a consultant to private equity firms and companies in the behavioral healthcare marketplace, I am a firm believer in financial and social ROI. Good business can improve the quality of people’s lives and strong results are good for business. It’s why I’ve committed my company, Empowering Synergy to that exact mission.

A Call to Investors Why Autism Services Needs Investment

A Call to Investors: Why Autism Services Needs Investment

By Dr. Ronit Molko

In the past five years, private equity investors have been taking a particularly strong interest in the field of autism services. That has led to many autism services companies being acquired or receiving capital from investors.

But what exactly makes the autism services field so attractive to investors?

Prevalence

The CDC estimates that 1 in 59 children born in the United States will be diagnosed with autism spectrum disorder. That’s an increase from 1 in 88 as of 2010, and 1 in 68 as of 2014. When I first entered the field, that number was significantly lower, with only 4.5 of every 10,000 children diagnosed with autism.

The cause of that rise in prevalence is still undetermined, however, many researchers suspect that a portion of the increase is due to a broader definition of autism spectrum disorder (ASD) and better efforts at diagnosis. In addition, minority groups have historically had significantly less access to resources and therefore the prevalence in those groups remains under-identified and as a result, we will likely see changes in prevalence in the future. Regardless of the cause, the rapidly growing population of children diagnosed with autism will drive a sharp increase in demand for autism services for the foreseeable future.

Adult Services

Currently, the majority of autism services are aimed at children. This is because early intervention is crucial when it comes to developing skills autistic individuals need to navigate the world and take care of themselves. It is also imperative to start intervention early, as therapy is most effective when the brain is still in development.

study from the International Society of Autism Research recently demonstrated that 80% of autistic individuals continue to require support, services, and supervision into adulthood. Adults with autism have challenges and roadblocks when it comes to finding employment, living independently, and forming interpersonal relationships.

Currently, only 10% of adults with autism live in independent homes[1]. Nearly half (49%) live with a parent or relative. That means there is a large segment of the autistic population who are adults living under the care and supervision of their elders. Someday, the family members caring for these individuals will no longer be there. This means there will be a considerable demand for adult services in the near future. Something the market is currently not adequately providing.

A Fragmented Market

The autism services landscape is highly fragmented. The market is mostly comprised of small providers that are founder operated and cover limited geographic locations. There exists a great potential for consolidation. With investors leading the way, service providers can be scaled, and more national players can emerge, especially now that legislation has created more readily available funding for autism services.

Trends in Reimbursement and Funding

Autism services is an industry dependent on third-party funding: individuals with autism are typically not the parties responsible for primary payment. Thankfully, 46 states at D.C. now have legislation requiring insurers to cover autism services. That’s up from 32 states just five years ago!

The Affordable Care Act (which remains law despite political posturing) also makes it illegal for insurance companies to deny, limit, exclude or charge more for coverage for individuals with pre-existing conditions. That means individuals with autism cannot be denied coverage for services.

Social Impact

While securing a strong return on investment has to be a priority for any investor, today many investors are also considering the social impact of their investment choices. For such individuals, autism services provide a very favorable opportunity for financial gains with the added benefit of empowering a disadvantaged segment of the population in need of significant support and opportunity.

[1] Roux, Anne M., Rast, Jessica E., Anderson, Kristy A., and Shattuck, Paul T. National Autism Indicators Report: Developmental Disability Services and Outcomes in Adulthood. Philadelphia, PA: Life Course Outcomes Program, A.J. Drexel Autism Institute, Drexel University, 2017.

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