Companies also need to focus even more on the digital aspect during the due diligence process. After all, many genuinely digital companies have completely transformed entire markets. Airbnb has caused quite a stir in the hotel market, and Amazon has turned the e-commerce industry upside down. Disruptive trends are also evident in smaller segments, such as traditional video rental stores, whose existing business model has been practically doomed to failure by Netflix and similar services.
So what does digital due diligence actually entail?
It analyzes all issues relevant to digitalization, assesses existing digital capabilities, and determines a company’s level of digital maturity. As a result, it clarifies how significant digitalization is for the business model. This type of business valuation is also so important because advancing digitalization intersects with the centuries-old insight that a company’s value is largely determined by its expected future earnings. Against this backdrop, it makes perfect sense to assess the existing business model for its future viability.
The key questions are therefore:
Is the current business model threatened by digitalization?
And to what extent does the company have the potential to turn the challenges arising from digitalization into opportunities for itself? The latter question specifically concerns the company’s level of digital development, the digital resources at its disposal, and the prospects for success of its digital transformation.
Take the automotive industry as an example:
It is still unclear whether electric propulsion will truly succeed. What is certain, however, is that electric car manufacturers will capture significant market share. Added to this is a second revolution: the self-driving car. This has significant implications for the business models of many companies in the automotive industry, such as internal combustion engine manufacturers and even the tire industry. If, at some point in the distant future, self-driving cars are able to communicate with one another, this will reduce wear and tear on components such as brakes and tires. Those manufacturers are therefore likely to see lower sales.
To predict the impact on these industries as accurately as possible, experienced due diligence consultants first examine the entire digital ecosystem in which the company operates. The value of the target company increases if it understands and meets the key performance indicators (KPIs) in the digital market. A holistic approach is promising here: Indirect competitors, service providers, and partners should also be included in the digital infrastructure of the business model.
Furthermore, it is important to assess the digital competencies of management and employees. This raises the question of whether there is a minimum level of digital knowledge within the company and whether employees are sufficiently trained to help shape these changes. Particularly at the management level, it is also necessary to assess whether the team has sufficient digital expertise to master the challenges.
In a second step, the auditors are responsible for evaluating the value-adding core of the digital business model. The due diligence consultants also assess whether the company has focused on the right key performance indicators for the business model and whether changes in these metrics are being interpreted correctly. This involves very specific considerations. For example, they determine whether the head of the IT department is capable of leading an expanded team following the transaction.
Keyword: IT - When it comes to digital due diligence, the IT department is arguably the most critical function within a company.
That is why IT due diligence is of particular importance. It involves the systematic assessment and evaluation of the existing IT infrastructure. For example, consultants determine how well IT planning aligns with corporate strategy. Mere technical details—such as whether sufficient server capacity and operating system licenses are available—are of lesser relevance. Rather, the focus is on determining whether the IT team is capable of implementing the planned schedule with the required quality and without incurring additional costs. Since companies aim to grow, the review also examines the extent to which departments can be scaled and whether development planning aligns with commercial planning.
