Is your company’s digital maturity impacting a potential deal?

The future of every company, in every industry, is now shaped by how it harnesses modern technologies to run a better business. For instance, 86 per cent of Canadian executives are ramping up automation and adopting new solutions, such as artificial intelligence (AI) to address productivity gaps, according to KPMG’s recent CEO outlook survey.

Dealmakers are becoming increasingly focused on technological maturity and digitally enabled growth strategies. One study of more than 1,300 global firms found that, on average, digitally enabled firms experienced a 14 per cent increase in net margin compared to their peers.

Indeed, companies that have a digital strategy that lays out how technology can enable growth, a roadmap for short and long-term initiatives, and an IT leader in place who helps management execute that roadmap do get higher valuations than those that don’t pay attention to digital.

Successfully maximizing ROI in an M&A deal should now include an in-depth look at how a company has invested in technology tools, platforms and processes, what gaps may exist and how it is positioned for growth.

A strong IT leader and a clear vision are vital for successful digital transformation, especially in M&A deals. They ensure technology aligns with business strategies, preventing fragmented implementations that can lead to failure. This alignment transforms technology into a strategic asset, driving better business outcomes.

Sharjil Salim

Partner, Operations Mergers and Acquisitions

KPMG in Canada

Identifying digital opportunities for sellers and buyers

Parties on both sides of a potential sale need to assess the digital maturity of their corporate asset. Sellers must conduct an assessment of their operations, ideally six to 12 months before taking their company to market so they have enough time to identify and unlock any untapped potential value. Buyers will pay more for growth plans that are underway, and even better are strategies that already benefit the balance sheet. By evaluating its digital maturity, a company can pinpoint quick wins to seize prior to putting out the “For Sale” sign.

Crucially, sellers can also make decisions about what investment plans to put on pause due to high costs and/or long ROI horizons. At minimum, sellers should capture in a comprehensive digital maturity report information that buyers should seek during due diligence, which will accelerate that process. Engaging a third party lends objectivity to the report, and helps identify aspects or opportunities a company may overlook on its own.

On the buyer’s side, a digital maturity assessment will spot any red flags that could require significant resources to update, but it also helps game out the potential for value creation, such as through automation and streamlining of operations, enhanced decision making and analytics, or cost avoidance from improved cyber security and compliance controls. In general, it quantifies what the company’s technology environment and strategy mean for the business.

An average of 87% of organizations have managed to use tech to increase profits over the past 24 months.

^{Source : KPMG global tech report 2024}

Assessing a mature technology strategy

So how does a digital maturity assessment work? At a basic level, it’s about understanding a company’s current state of technology and its path to enabling greater business value. Those opportunities can come in the form of optimizing IT spend by consolidating various platforms, for instance, or enhancing automation and digital business processes. This needs to include:

Core systems (ERPs, CRMs, etc.)
Technology infrastructure, including networking and storage
Data and analytics processes
Security compliance
Customer and employee communication platforms

A core question to answer is just how truly digital and automated the company’s operations are. Is the company only communicating with clients via email, for instance, or are they leveraging a range of digital channels, such as chatbots, social media, and CRM systems, to enhance client engagement and streamline operations? Is the IT environment scalable and agile, or is it based on legacy monolithic technology? Then, by benchmarking the company against relevant competitors and its industry as a whole, you can determine whether technology is right-sized for the organization.

But any assessment must also examine how the company’s technology strategy and roadmap connects to its larger business strategy to help drive sustainable growth. Is IT primarily a cost centre, or is there evidence that technology plays an integral part in driving the strategy now and into the future?

All of this paints a picture of a company’s technology maturity and any current roadmaps for further investment – information that helps identify gaps and itemize areas with the largest opportunity for improvement.

Direct-to-consumer businesses and data-rich companies have significant opportunities for digital maturity assessments, which can help identify gaps in digital capabilities and prioritize high-return investments.

Jesse Bond

Senior Manager, Technology M&A

KPMG in Canada

Fostering digital value

There is, however, a larger story to tell. Digital initiatives are now central to generating value inside modern businesses, making them essential for supporting ROI projections in an M&A transaction.

In this context, “value” from digital initiatives manifests in a few ways. First is improving EBITDA through cost controls and efficient spending. But companies can also improve their cash flow through better data and more sophisticated digital systems that ensure customers pay on time or help reduce inventory. They can also improve revenue growth through platforms that better engage customers.

A technology maturity assessment should feed into a deeper evaluation of a company’s opportunities to create digital value, particularly the potential initiatives that could be prioritized to produce high impact for relatively low effort. These can fall into a few categories:

Customer experience – Initiatives around invoice, billing and contract automation, dynamic pricing or AI chatbots can help companies optimize their sales force, accelerate order to cash and increase average customer value.
Operational efficiency – Process automation and supply chain optimization can be achieved through such opportunities as AI-enabled prediction or robotic units.
Data and analytics – Pricing optimization, predictive analytics, machine learning and big data can all play roles in defining KPIs for tracking revenue and operational efficiencies.
Technology optimization – Reduce IT operating costs while improving scalability and business agility through cloud migration, system rationalization and integration, and cleanse the environment of shadow IT.
Innovation and workforce enablement – Fostering a culture of innovation, advanced scheduling and demand management, optimized talent management and VR/AR training are just a few ways companies can remain competitive through business disruption, optimize resourcing and employee skills, and find collaboration efficiencies.
Cyber security and compliance – Mitigate the risks of business disruption and reputation damages while optimizing cyber security spend, through thoughtful and ongoing IT risk management processes integrated into enterprise-wide risk management activities.

It’s important to be focused – digital transformation programs are often large and expensive, requiring a long runway to achieve ROI. Instead, an effective digital value creation assessment in the context of M&A should primarily pinpoint opportunities that drive top- or bottom-line EBITDA gains, or free up working capital. Buyers should seek a clear investment thesis backed by quantifiable results and value.

Case study: How digital value creation enhanced a deal

In one instance, a client’s portfolio company had planned a costly and extensive information systems transformation that would likely have lowered the value of the deal. By conducting a digital maturity assessment and creating a roadmap, our team found ways it could focus on quickly implementing smaller high-value programs while also demonstrating to buyers that the company had a solid technology foundation with compelling future plans. In all, more than $50 million in value was unlocked.

It’s a vivid example of how, to some degree, every company is now a tech company. Even if digital platforms are not yet core to a company’s revenue and growth, they must have a role in its broader strategy and how it engages employees or services customers. To get the best deal possible, sellers and buyers alike need to demonstrate current and future ROI, with digital technology playing a big role in shaping the market value of a company’s business model.

How we can help

KPMG's Deal Advisory team offers comprehensive transaction to transformation services. Backed by deep sector knowledge and data-driven strategies, we can help you create more value through all phases of M&A transactions and beyond, enabling performance transformations that deliver tangible financial impact.