Rethinking The Traditional M&A Process

By Simon J. Little, CPA, CISA, and Ann Suding, CPA

The first 100 days after a deal are critical for strategic buyers and private equity groups seeking to capture value through mergers and acquisitions (M&A). During this time, few are under more pressure than the chief financial officer (CFO) to ensure the process runs smoothly. With limited time and often limited resources, the CFO needs to integrate financial and accounting operations, establish a system for measuring performance, and prepare the business for continued growth. Amid it all, the CFO must continually manage stakeholder expectations.

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As the general contractor of the M&A process, the CFO is responsible for determining what steps need to be taken and how those steps should be prioritized. The sequence of steps is important to get right, as each one can feed off the others. From there, the CFO needs to create a realistic timeline for completing each step, and identify the right subcontractors to do the work, whether internal or external.

In running the integration process, the CFO needs to be mindful of making the best use of data, managing financial reporting requirements, and scaling the business, all of which depends on having a solid team in place and specific strategies at hand.

Making the best use of data

Data plays a larger role than ever before in all areas of business, and it is critical in the measuring of a business during the M&A process. Ideally, in the lead-up to a merger or acquisition, companies have already assessed the quality of the data they hold so they can adapt to increased reporting requirements and oversight after M&A.

However, if this is not the case, the CFO will need to lead an effort to conduct that quality assessment. That’s because the company must do more than just report the data: It needs to understand what it all means. Good visibility into available data sets and their quality and consistency can facilitate the accurate measurement of business performance.

Once they can comfortably attest to the quality of data, the most effective CFOs will take a forward-looking approach in determining how to use all the data they receive, turning the data into insights that can inform business decisions.

Financial reporting requirements during the M&A process

A full and exhaustive due diligence process is a one-time exercise at the start of the convergence process, but over time, additional information will be needed on a regular basis. CFOs need to understand what that information is and why it’s important, and they need to have the tools and processes in place to be able to provide that information consistently.

The reporting requirements for the new, combined entity will come from the acquirer, whether it’s a private equity firm or a larger company acquiring a smaller one. The acquirer will dictate what information it wants to see to understand the company’s performance, and here again, solid data collection is key. Across both generally accepted accounting principles and internal reporting requirements, the CFO will need to follow the acquirer’s lead on expectations for the reporting package, including the cadence of the reporting.

Several complexities can arise in the process of streamlining the financial reporting of the combined entity. For example, an add-on acquisition might be on a cash basis instead of accrual, or the company acquired might not be compliant from a revenue recognition or lease guidance standpoint. Other pitfalls include variable interest entities that should have been consolidated, inconsistent alignment of chart of accounts, and unreconciled accounts.

Accounting’s role in scaling the business

The CFO needs to be on the lookout for indicators of whether the business is performing or underperforming. The metrics to be measured likely will be similar to those used prior to the merger or acquisition, including things such as quality of earnings, working capital, and cash flow.

Ultimately, the new entity needs to have processes and tools in place that can handle the addition of new businesses, including a best-in-class enterprise resource planning system, a financial reporting and consolidation tool, a financial planning and analysis tool, a close management tool, data analytics and business intelligence, and a human resources and benefits solution. If processes are sound, they will be easier to scale for future M&A. Throughout the M&A process and beyond, a wider lens is essential to seeing the bigger picture.

Outsourcing to accelerate progress

The CFO needs a solid team in place, with the right expertise and skill sets to meet the wide array of accounting and financial reporting needs after M&A. Assembling this team is challenging even in the most favorable labor market. In 2022, labor market challenges and particularly low unemployment early in the year meant that resource constraints were even more pronounced than usual.

If the accounting department is struggling to work through the CFO’s checklist, organizations might consider engaging outside specialists to help.

Need guidance and strategy on navigating accounting and financial reporting issues? Find the latest resources from Crowe.

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