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:

Take Inventory of all IT resources identified above.
Assess and Evaluate IT Resources using in-house expertise or outsourced
consultants.
Review Security and Privacy Issues that impact IT use going forward.
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:

Equipment
For each device, it is important to track technical features, capabilities
and administrative data.

Technical features include the following: components attached, processing
chip, hard disk size, memory size, built-in communications, video graphics
memory, sound card, type and quantity of external connectors (USB, Firewire,
audio, video, PCMCIA, serial connector, parallel connector), pointing devices,
network capacity, Ethernet, wireless or cellular connections.
Capabilities include the following: what the computer is used for, such
as personal staff use, common applications, server or network maintenance,
wireless adapters, and Ethernet connectivity.
Administrative data includes the following: date purchased, date placed
in service, original cost, depreciation already taken, registered owner, installed
operating system, installed software applications and utilities. IT equipment
that may exist includes the following items:
- Computers — desktops, PC, Macintosh, Windows media, other brands
- Computers — laptops, PC, Macintosh, tablet
- Computers — handhelds, PDAs, Blackberries
- Computers — accessories (printers, scanners, fax machines, copiers,
  routers, carry bags, flash memory cards, disks, external hard drives,
  etc.)
- Servers — office networks, web hosting, data farms, peripheral
  management
- Accessories (not dollar valuable assets but essential for equipment
  to function) — cables, power plugs, desks, chairs, battery backup,
  surge protectors, uninterruptible power systems, etc.
Software
The world of software ranges from operating systems to generic applications
to custom-designed programs. The basic information to collect about software
includes name, vendor, registration ID, date acquired, number of user licenses
owned, name registrant, product description, who uses, last updated, number
of licenses and their expiration date, vendor name and contact information,
registration information, and password controls. IT software that may exist
includes the following:
Software — operating systems, communications software, utilities
Software — custom coding for specialized hardware or networking
use
Applications (common) — word processing, spreadsheets, tax returns,
accounting
Applications (unique) — industry-specific programs, any custom modifications
to generic or purchased programs
- This needs to include all documentation, procedures and methodologies
  for maintenance and support.
- If this product is used for a specific client(s), it needs to be assessed
  whether this client(s) can be retained by the buying firm.
- Any custom application needs to be compared to products that may be
  used by the buying firm. If there are similar products, the evaluation
  needs to determine whether to keep both or replace one of the products.
Process
All of the procedures, checklists, methodologies, how-tos, and learning
materials are important components in the computation of IT value. With
generic equipment and application software, finding the support materials
should be easy. It is necessary to verify that no changes have been made
to the generic components. However, with custom applications and related
IT resources, all of the process components must be collected and reviewed.
The question to get answered is whether or not the processes can be implemented
and used by the buyer. The importance of process highlights the fact that
computers do not work independently of people — staff and clients.
In some instances, the process components may have more value than the actual
fully depreciated computer equipment.

Services
This category includes all of the support provided by outside resources. Information
to gather about services includes name and contact information, contract terms
and obligations, expiration date, and an assessment of service quality. Services
can be contracted for any of the following:

Maintenance on equipment
Upgrade maintenance on software
Data backup storage
Recovery operations
Offsite storage facilities
Consulting contracts for maintenance of custom programs

Websites
It is likely that both the buyer and the seller have functioning websites.
A determination has to be made whether it is appropriate to maintain both
sites or take one down. As part of the review, it is important to identify
the following:
Who has administrative and technical control of the web domain name?
What is the expiration date of any registered domain?
All of the e-mail addresses and whether combined staff will have to change
their business e-mail address.
Maintenance of web content that needs to be maintained.
Hosting agreements.
Any financial issues in the event the website accepts credit cards for
products sold. If it is determined that one or more websites is to be canceled,
it is necessary to specifically enter the administration function of the
domain registrar and host provider to specifically cancel the account. If
not, contract payments will continue to be required. Further, you can set
up an automatic domain transfer so that any access to the canceled website
will be immediately transferred to the current website.

Facilities
Depending on the size and type of technology at the selling firm, there
can be significant floor space, storage, furniture and fixtures and other
physical assets. Review of the facilities includes the following questions:
Is the physical space usable going forward?
Is there sufficient electric power for current and anticipated new equipment?
Is there sufficient HVAC for current and anticipated new equipment?
Are there conflicting wireless networks in the neighborhood?
What is the value of the space — leased, rented, owned?
Is the location compatible with the buying firm’s location?
How good is the physical security of the facility — locks, windows,
proximity to risk areas?
Are there natural weather risks nearby — flooding, mudslides, earthquakes,
etc.?

People
No resource can be assessed independent of the people that are part of the
IT resource. This includes developers, technical support, technical training,
quality control and customer support. It is important to evaluate what resources
are needed going forward. For example, if a custom application is completed
and installed, what technical resources are required for its support and use?
If the application is under development, what other resources are necessary
for completion and implementation.

The review and assessment of personnel includes full-time, part-time and
contract. Often, the most valued resources within an organization are the
people. The assessment has to determine how many people are necessary and
whether the combined staffs can provide too many or too few resources. It
is possible that one result of the combination will be people from either
firm wanting to leave. This may require finding new people to fill their roles
or accepting the assessment that the people do not have to be replaced.

Evaluating personnel should be conducted over a period of time so that fair
and appropriate evaluations can occur. Making quick judgments on people within
the technical sphere can create future problems because the current personnel
may be aware of little known features, secrets and other components about
the firm’s information technology.

Other
The IT equipment, software and services can be separated into two groups:
stuff that has value and stuff that has no value. It is necessary to establish
rules for what additional procedures are necessary to integrate and use the
acquired resources, including the need for the following:

Set up e-mail addresses for all personnel from the selling firm who are
joining the buyer.
Train new people on applications, policies and procedures on the buyer’s
technology.
Train buyer’s staff on applications, policies and procedures from
the seller’s technology.
Identify and transfer ownership of patents, copyrights, trademarks, service
marks, contractual agreements, employee agreements, partner agreements and
other legal obligations.

For good business practices, remember to review any outstanding payables
or financial obligations that are attached to the computer technology resources
that are being transferred to the buying firm. Any amount will reduce the
value of the information technology.

Assess & Evaluate IT Resources
Taking inventory requires a lot of work. While taking the inventory, it is essential
to assess the fitness of the technology resources for what is needed going forward.
Hardware, software, facilities and people all have to be evaluated in direct
relationship to what is needed to support the buyer’s practice.

Some of the basic components of the value process include the following:

Age of equipment.
- The older devices may have issues supporting current applications.
- It may not be possible to connect with newer hardware.
Operational Worthiness – Can the computer support current needs?
Compatibility between both firms.
- If one firm has PCs and the other has Macs, use needs to be resolved.
- Having compatible resources is the best value going forward.
If equipment is not compatible, a decision has to be made as to which type
to keep.
Accounting issues include costs, depreciation and asset value.
- The surviving firm needs to integrate accounting information.
Help from outside experts with requisite technical skills to assess the
resources.
It may be valuable to have technical people from one firm review the other.

The bottom line for value starts and ends with the usability of the IT resources.
In the calculation, usability must include an estimate of how long the resources
can be appropriately used. A six-year old computer will not be the best device
to attach to a wireless network. The reason is the chipset will be slow, the
hard drive will be under basic requirements, and it is possible that the operating
system may be three to four versions away from current. Figuring out how many
years any resource may have will be aided by using either internal or external
technology experts.

Lastly, but by no means least value, is the concept of “secret sauces.”
This not-so-highly-technical term references whether there are any IT resources
that can provide a substantial competitive edge or substantial revenue increase.
For example, if a particular custom computer application will enable the buying
firm to provide services to an industry (government, not-for-profit, manufacturing,
etc.) that it does not presently serve, there will be a major opportunity for
expanding the practice. On the other hand, if the buyer already owns the custom
application, there would be no increased value to be included in the acquisition.

Knowing which technology can remain and which technology has to be replaced
is another component of calculating the IT value. As helpful as one or multiple
computers have been, if they are not usable going forward, their collective
value is zero. Knowing the replacement cost can be used in reducing the overall
calculated value.

Review Security & Privacy Issues
Evaluating the technology resources will provide two results: resources to keep
and resources to discard. It is essential to conduct extensive security checks
for the resources that are brought into the surviving firm. Anti-virus and anti-spyware
are essential utilities to assess and evaluate all potential computer equipment
that will be acquired. In addition, other technology resources need to be evaluated
for their impact on the technology resources. A few examples include the following:

Programs — original disks and backup copies.
Programs — documentation, registration numbers and licensing information.
Paper files (examples):
- tax returns
- audit workpaper files
- client correspondence.

Electronic data needs to be evaluated as it impacts any services being provided
from a firm to a client. For example, tax returns, financial planning and audited
financial statements are essential for providing client services. This data
needs to be assessed and a determination made that the data is complete, free
of any virus or spyware and will be usable.

In addition to making sure that valuable data is retained, electronic data
that is unusable needs to be removed from all computers, both retained and discarded.
For computers that are being discarded, it is essential to make sure that data
and programs are removed from the hard drives. The effort has to be more than
just deleting data. It is necessary to use a utility program that will “wash”
the hard drive of all data so that it is not retrievable by anyone at any time.
It is possible that programs and data on computers that are acquired have been
protected by passwords or the entire file has been encrypted. To make sure that
programs and data are retrievable when used by the firm, it is necessary to
obtain all passwords and encryption pass codes. This will enable access to the
data and programs when needed. Moreover, it would be valuable to change those
passwords and pass codes as soon as possible. This will help prevent unauthorized
access from former employees after the buy/sell transaction.

Make Value Decisions
Pundits say that beauty is in the eyes of the beholder. Often, business value
falls within this view. What makes a company valuable, however, goes beyond
any beauty contest. The information gathered and evaluated as described above
can be used within a range of mathematical and financial calculations. The previously
mentioned Productivity Survey expresses a simple formula:

Best Practices = Better Productivity = Increased Profitability

This formula identifies how quality technology use promotes personnel and client
productivity, which results in increased gross and/or net revenue. Buying another
firm’s assets presents an opportunity to consider how the acquired technology
can add value to the services and support offered to clients. Moreover, evaluation
of technology has to assess how the resources are used as both a practice support
tool and a revenue generator. The value of a firm’s technology is the
accumulation of individual resources and how the technology provides a competitive
business advantage.

Whether the equipment and resources are used or new, calculating replacement
cost is one measure to help your decision process. In addition, the time and
cost of installing software, connecting all cables, testing security procedures,
and updating inventory records has to be included in any going-forward evaluation
and plan.

There is no single answer that can identify whether new is better than used
or vice-versa. As a general rule, it is better to keep the computers and resources
when the currently owned equipment is functional for the work that is being
done today and for work anticipated to be done over the coming 12 months. If
change is contemplated over the coming few months, then it may be worthwhile
to install new equipment rather than bring in the old and go through the changeover
process within a few months. Value decisions have to include labor costs, possible
new software licenses, and retraining of staff and customers.

Of course, several tax considerations will impact your value decisions, as
well. How to handle the tax issues surrounding the discarding of equipment is
part of the expertise you need to bring to this process. Once the value of the
technology is determined, tax implications need to be considered. For example,
if equipment is to be discarded, one of the alternatives can be to make charitable
donations of the equipment. What can be deducted is best determined through
your tax experts and advisors.

Other value issues to consider surround the acquisition of used technology
resources. For example, even if the equipment is not immediately usable, consider
whether any of the equipment can be potential replacements for future equipment
failure. Hard drives, printers and monitors can fail. It is often expensive
to repair this equipment, and having a small inventory of replacement parts
can be cost-effective. In addition, there may be future growth opportunities
as new employees are hired or services are expanded, and this equipment can
be installed and effectively used.

As part of the overall process, it is essential to identify the firm’s
plans for future technology use. With growth, IT resources will be expanded.
Success is best achieved when the expansion is done in an orderly and managed
process.
When buying or selling a practice, technology components can provide significant
value. It is important not to overvalue or undervalue these components and resources
from the selling firm. If necessary, hire professionals when the appropriate
expertise is not available within your firm. And, at the end of the day, never
lose sight of the important. Everything is negotiable.

———————————————–

Richard Oppenheim, CPA, CITP, has used and written about technology for
more than four decades. He currently provides advice through the Oppenheim Business
Group. He can be reached at richopp@oppenheimgroup.com.

Technology