Is Your IT System
an Asset or a Liability?

As one software vendor lamented when interviewed for this month’s article on scheduling and costing systems, service centers will spend a million dollars on a new slitter with little hesitation, but procrastinate for years on a much smaller investment in information technology. Why? Because they readily understand the value a new slitting line will bring to the company. The value of new software is not as easy to observe.

Taking the question of software’s misunderstood value proposition even a step further is Adam Fein, president of Pembroke Consulting in Philadelphia, who writes that many business owners do not pay enough attention to the impact of technology on the value of their business. In this time of mergers and acquisitions, when so many metals companies are changing hands, sellers must consider whether their IT system will be viewed as an asset or a liability.

Fein’s consultancy specializes in wholesale-distribution businesses of all types. The distribution industry’s strong performance of late is attracting interest from private equity funds with billions to invest. Fein makes the connection between business value and technology in three situations—a distributor planning to sell to a financial buyer, a distributor planning to sell to another distributor, and a distributor contemplating the strategic acquisition of another distributor.

Financial buyers purchase private distributors as an investment and therefore consider the potential return from owning the business for four to six years. In general, they are looking for well-run companies that provide value-added services, have solid management teams, capable IT systems, thorough training programs, defensible market positions, stable cash flows and multiple growth opportunities. Indeed, Fein reports, financial buyers today are displaying a great willingness to pay premium prices for leading companies, often even more than strategic buyers.

The financial return to a buyer is strongly influenced by the level of value-adding technology already at work and the technological compatibility with other systems. Financial buyers view older IT systems with "homegrown" part numbers and proprietary standards to be liabilities. “Your company should purchase a modern, scalable IT system at least two years ahead of any selling date to be viewed as an attractive acquisition target by a financial buyer,” Fein asserts.

On the other hand, many distributors are considering strategic acquisitions in today's active market. Technology influences the financial return to an acquiring company by affecting the quality and speed of post-acquisition business integration. A growth-oriented IT infrastructure must support rapid integration of an acquired company's customer records, orders, inventory, warehouse operations, transportation and finances, Fein says.

Finally, a company contemplating a sale to a strategic buyer should put itself in the potential buyer’s shoes and make a thorough asset and liability evaluation of its IT system. Those who are honest with themselves should recognize that an older, proprietary IT infrastructure significantly decreases the growth potential of their business and the sale price they can expect to receive.

Just because you can’t see software hard at work like you can a big, noisy slitting line doesn’t mean it’s less valuable to your organization—especially when it’s time to sell.