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Does technology add value to a business sale?

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Recruitment companies are fast paced, high activity businesses that in many cases have been late adopters of improvements in technology solutions. This is quite likely a matter in common with many small businesses that are constrained by resources and time.

The strategic benefits from effective technology support are well enough understood by business managers at all levels. However, it is a challenge to be able to devote the time to analysing and assessing just what the optimal solution for your business own unique requirements. There are lots of vendors only too willing to promote the advantages of their software over the rest and just what level of functionality is really needed to be effective day-to-day.

Add to that the burden of implementation and accommodating the inevitable changes to the way things are done after the introduction of the new system and it is a time consuming and distracting process.

This is not to down play the benefits from using technology effectively but it is important to acknowledge that upgrading it can become a major project with big potential gains and some nasty headaches if it goes wrong.

Ultimately, good technology used effectively should enable the business to increase productivity. This should then be reflected in the level of profit generation.

Business Improvement Focus

There are a number of key benefit areas from better use of technology that include:

1. reduced expense

2. increased revenue

3. improved margins

4. improved quality

5. improved client acquisition

6. improved client satisfaction

7. increased speed.

Measuring these improvements is of course not always so easy. Reduced expenses through automation of processes is probably the simplest to measure but it becomes harder to determine quality improvements and their impact on results for example. Even assessing the exact contribution from improved technology on increased revenue can be debatable. There can be other contributing factors that impact revenue growth.

Realising value

There are many articles on the topic of Information and Communication Technologies (ICT) and the benefits of effective usage for business. The emergence of cloud based computing and consequent productivity gains have been well covered. In the last few years the explosion in social networking options has had a demonstrable impact on how we do things in recruitment. This is a trend that will clearly continue and for which there are, again, many interesting articles.

Related: How your networks can improve your business sale opportunities

This article is concerned with whether effective use of technology creates value for businesses that is reflected at the time they are sold.

Put simply, in most cases the business benefits created through ICT should translate to increased profitability. The reduced expenses, increased revenue, margins, client numbers and so on should mean that the business makes more money! It is this that is the creation of value from technology improvements. The fact that you have greater profit is then reflected at the time of a sale transaction when your increased profit is typically multiplied by an agreed factor (the multiplier) to achieve a sale price.

Unless there is something unique about your ICT systems that allows you ownership of the Intellectual Property (IP) involved then buyers are not likely to put a direct value on your technology.

Buyer Issues

Sometimes the technology path taken by companies can lead to unexpected issues for buyers. One fairly common problem relates to whether there is clear ownership of the technology. This is especially so for software where there has been customisation work done and where ownership can be in dispute when the business is sold. Fully customised software or more commonly licensed software with custom adaptations may have been worked on by contractors or consultants who may lay claim to intellectual property rights.

As software licence arrangements vary between vendors and can change over time the due diligence process of determining the licences currency can be painstaking requiring an inventory of every software product on every computer.

Possibly the greatest surprise for the acquiring company can be the realisation that the systems don't do what you thought they did. Or that they aren't flexible enough to do what you want them to do in the future. This can have substantial implications for the planned integration and operations of the business. And again this may mean expert advice when completing due diligence investigations.

Extending this point further to the post acquisition period and at some point the buyer will probably want to integrate some aspects of the systems with their own for the sake of efficiency and savings. Though this is an issue of management after the acquisition it can again be a resource intensive commitment that in the fast paced, "lean" world of recruitment can be a major distraction.

Summary

There is no need to put a case that ICT solutions add value to business performance. That is well documented. However, there are pitfalls in getting a business to a point where the use of their technology is near to best performance and it can be a drain on key company resources to get it there.

For acquiring companies assessing the current performance and future capability of technology in a target organisation requires expertise and planning. Not doing due diligence adequately on ICT can lead to costly problems down the track.

For sellers, if you can prove you have technology that supports your business with tangible benefits then you can expect to see this rewarded because it increases your bottom line and that is what your buyer will be paying for.

Originally Published in Recruitment Extra May 2011

Categories: M&A

Tags: Strategy, ICT Solutions, Recruitment Extra, Business for Sale, Buy a Business, Business Improvement

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