Evaluating Technology When Buying or Selling a Practice

From the Dec. 2006 Issue

The practice of accounting requires sound business practices to support its operations. This includes the valuable implementation of information technology resources. In the 21st century, information technology is one of the many measurable assets of the firm. When accounting practices are acquired through a business sale transaction, it is imperative that information technology be reviewed, assessed and valued. No matter which side of the buy/sell transaction you are on, the value of the resident technology needs to be appropriately and effectively calculated.

While technology is clearly not the only component to consider when contemplating the buying or selling of a practice, the focus of this article is the valuation of the technology being acquired from the selling firm. This focus does not suggest ignoring all assets; liabilities; real estate owned, leased or rented; revenues; expenses; and personnel in the analysis and determination of total selling firm value. The starting point for any buy/sell transaction requires an understanding of the most basic of logical statements — the need for both a willing buyer and a willing seller.

Whether you are a buyer or seller, you need information about the seller’s technology resources. The buyer is more interested in the ongoing capabilities and effectiveness of the computer resources as the buyer will have to make decisions as to how these resources are usable on a going forward basis. The seller needs to help with the determination of the fair value of such resources. It needs to be understood that information technology includes a combination of the following:

• Hardware — computers & accessories
• Hardware — networking equipment & accessories
• Software — generic (MS Office, QuickBooks, tax preparation, etc.)
• Software — custom (application- or industry-specific, etc.)
• Personnel — technology development & support
• Personnel — staff knowledge of technology used by the firm
• Procedures & Methodologies — used to support generic software & applications
• Procedures & Methodologies — used to support custom software & applications
• Data — client information
• Data — firm business information
• Data — generic content
• Data — custom created content
• Knowledge of what products work well and what needs improvement

The seller has to be open and forthcoming with descriptions of how the resources are being used and supply all of the required paperwork that identifies ownership, warranties, repair history and so forth. This magazine offers a valuable resource in its Productivity Survey. The Productivity Survey is free and available to all accounting firms nationwide at www.CPATechAdvisor.com/productivity. It includes a series of questions relating to professional practice standards, office processes, backup procedures, paperless office technologies, connectivity and general technology utilization. This tool should be a required element of the overall valuation process.

Evaluating the technology components requires time, expertise and effort. To perform a proper review, the following steps need to be accomplished:

1. Take Inventory of all IT resources identified above.
2. Assess and Evaluate IT Resources using in-house expertise or outsourced consultants.
3. Review Security and Privacy Issues that impact IT use going forward.
4. Make Value Decisions:
   • Are the IT resources usable by the buying firm going forward?
   • Do the IT resources conflict with IT resources used by the buying firm?
   • Do the IT resources replace any IT resources used by the buying firm?

Take Inventory
The purpose of taking inventory is two-fold: to know what exists and to collect the appropriate information to complete the necessary comparisons in order to determine future business compatibility or lack thereof. The following resources are to be inventoried: