Buyers who skip evaluating IT systems of a target company may be making a very expensive mistake, according to accounting and consulting firm Crowe Horwath.
When deals close without proper IT due diligence, buyers may not realize that the lack of spending on IT systems can make earnings appear higher than they should be.
“If the company you’re buying doesn’t already have the proper controls, infrastructure and information protection in place, you could be facing a very costly IT problem,” said Jeff Shaffer, a senior manager in the IT advisory group of Crowe’s performance practice. “Not only might buyers see lower-than-expected financial results after purchasing the company, they may also have to spend more money than expected to remedy the situation, as well as possibly put the business at risk in terms of operations or customer service.”
Shaffer listed nine key warning signs that indicate IT due diligence is needed in a company targeted for purchase:
• Lack of confidence in the financial reports generated by the current systems;
• Inability to generate common operational reports;
• Multifaceted, intercompany transactions, especially related to consolidations and eliminations;
• Complex supply chain transactions;
• Multiple systems that interface with each other, such as separate point of sales, inventory order entry or billing systems;
• Inability to use the current system to reconcile balance sheet accounts;
• Buying a division or business unit of an existing company to create a new, stand-alone company or merge into another company;
• Buying a company solely for its technology; and,
• Buying a technology company in, or approaching, bankruptcy, as IT budgets are often one of the first cut.
