Accounting in M&A Transactions – Navigating the Numbers | Foley & Lardner LLP
A key to success for any growing business is to navigate the numbers, with success and visibility in accounting and finance, preferably up and to the right. Businesses today face accounting challenges as they grow their businesses, especially when growth occurs through mergers and acquisitions (M&A). M&A transactions present both buyers and sellers with multiple challenges, as complex requirements can arise from business acquisitions and sales. Building the right process and bringing in the right resources is essential for organizations to do good business and succeed in post-closing integration. Here are some pro tips on how to get it right from the start:
As part of financial accounting due diligence, companies should prioritize analysis of the company’s assets, sales, cash flow, and GAAP earnings position. In exercising due diligence, the buyer should consider whether the financial statements of the target and the buyer have been prepared under the same accounting principles (e.g., US GAAP, IFRS as applied by the IASB or otherwise) and the accounting practices followed. When companies enter into M&A deals, they often inherit dissimilar financial systems and charts of accounts, exposing them to greater challenges related to reporting and compliance requirements. Buyers need to understand these differences and how they affect buyers’ assessment of company operations. Failure to collect all relevant data creates additional challenges in financial, tax, statutory and regulatory reporting capabilities. The architecture of an accounting due diligence process allows a buyer to understand the purpose of the transaction early.
Design post-closing purchase price adjustments in definitive agreements
Accounting plays a prominent role in the definitive acquisition agreement, both in definitions and in design. Often, so-called “price supplement” clauses link subsequent payments of the purchase price to the evolution of financial indicators (for example, turnover or EBITDA). The determination of these key figures and the purchase price depends on the underlying accounting methods. The acquirer and the company will want to calculate triggering financial indicators according to their respective accounting methods. To the extent that they do not match perfectly, the parties may agree to attach to the purchase agreement a sample calculation of the trigger indicators or additional parameters that should be used to determine whether a purchase price adjustment is appropriate. It is also customary to include a purchase price adjustment mechanism based on the company’s net working capital, in which the buyer will generally set a target amount of net working capital at the date of closing, or “bogey”, and there will be a dollar-to-dollar adjustment if the actual net amount of working capital at the closing date turns out to be higher or lower than the bogey, whether determined at closing or adjusted subsequently after audit. The buyer and the business will need to negotiate and agree on the target level of net working capital to be available at closing. A sample schedule for calculating net working capital can help avoid potential disputes in the future. In addition, the accounting system can play a role in the assessment of force majeure clauses and possibly influence the figures for price supplements in the event of events beyond the control of the contracting parties.
Preliminary purchase price allocation and post-merger integration
Also, before signing a contract, the buyer should think about how financial reporting will change after closing. This concerns, on the one hand, the accounting treatment by the absorbing company of the merger-acquisition operation. Once the transaction is completed, however, the target company and its financial statements must be integrated into the buyer’s financial statements (and separate financial statements or pro forma financial statements giving effect to the transaction in previous periods , can The way the purchase price is allocated among the target assets in relation to the book value of the target’s assets in the target’s or seller’s financial statements can have a huge impact on the returns of the deal Changes in accounting may occur if previously applied accounting between the acquirer If the purchaser is a public company, the Securities and Exchange Commission and the Public Company Accounting Oversight Board may have requirements and time limits or require changes.
Complex business-to-business agreements and transactions
During the M&A integration journey, companies often enter into multiple business-to-business transactions in which they transfer assets, liabilities, revenues, and costs in order to achieve business efficiencies and other integration goals. These transactions may involve intercompany agreements, increasing the risk of misstatements and unreconciled intercompany balances.
During the M&A process, the importance of a strong finance and accounting process and team cannot be understated in navigating the numbers. Your business leaders, lawyers, and bankers need to work closely with them to achieve the right goals.