Keep accounting a priority during the acquisition process

Simon J. LittleAnn R. Suding
Keep accounting a priority during the acquisition process

Accounting might be an afterthought during the acquisition process, but failure to address key elements can lead to future burdens. Use this checklist to prevent issues.

Get the latest insights and guidance on accounting advisory, straight from our specialists when you sign up for Take Into Account.

When acquiring a company, the decision-makers are sometimes so focused on closing the deal that accounting becomes an afterthought. However, making certain preparations early in the acquisition process can help set expectations and identify needed resources down the line, and it knocks down one more obstacle to help meet financial reporting deadlines. Here are a few ways to help keep accounting in the forefront – and keep financial reporting on track.

  • Set reporting expectations with the organization, lenders, and other users of financial statements. Is the target's financial data unreliable? Will there be multiple reporting units? Does the target have international operations? If the target company is the financial reporting entity, will the target be electing push-down accounting post close, and, if so, are predecessor financial statements required based on lender agreements or preference of the new owners? If present, all of these can add to the cost of reporting – and it’s important to both understand and communicate those expectations upfront.
  • Consider accounting due diligence. A variety of different types of due diligence exist – but accounting due diligence is its own category that can help reveal issues before the acquisition process is complete. This can cover everything from advising on significant agreement terms to evaluating the working capital or earnout terms based on the target’s historical and current financial performance. For example, reviewing the term sheet or draft agreements for significant terms can help buyers determine what the accounting result of those terms might be and decide if they want to make any changes before close. Or there might be an earnout in conjunction with an acquisition, but that earnout might be structured to be accounted for as a future compensation expense – which is not always desirable. Advising on the structuring of the working capital and earnout language is another consideration to give buyers the most flexibility for potential purchase price adjustments. Accounting due diligence can cover all of these categories and more, providing an advantage. A plan should be in place to address findings in due diligence related to areas like inventory, revenue recognition, and leases.
  • Compile a list of needed accounting reports from the target's system. While buyers won’t need these reports until after close, making sure they are generated at close and stored will save the time and headache of re-creating or reconciling that information after close, especially considering the date of close likely will not be at month-end.
  • Get a pre-deal valuation. While getting a valuation is standard post close, a pre-deal valuation can offer some clarity. It can help buyers see whether future cash flows of the target support the purchase price before it's agreed to, or it can support the need for some form of earnout or contingent consideration in order to bridge the purchase price gap between the buyer and seller. This will help buyers feel confident both in the negotiations and supporting the price position.
  • Don’t be afraid to ask for help. Buyers reading through this list might realize that they don’t have the time or the knowledge base on their teams to take on this additional work. In fact, most companies don’t have this level of knowledge and expertise on their teams, and the acquisition process – and costs – can be overwhelming. Working with one trusted adviser that can handle technical accounting and demonstrate how to apply it on a day-to-day basis can be incredibly helpful. Plus, working with a full-service firm means as other things come up, there is still one point of contact that knows the business and the details of the deal.

It’s easy to get caught up in other details during the acquisition process – but leaving accounting details to the end of the deal can cause added stress. These tips can help keep accounting on track throughout the acquisition process.

Check out Take Into Account

Keep up on the latest in accounting advisory with insights and guidance from our specialists.

Contact our team

If you have more questions about acquisition accounting, our team is here to help. Reach out to our accounting advisory team to find out how we can assist you, no matter where you are in the acquisition process.
Simon Little
Simon J. Little
Partner, Accounting Advisory
Ann Suding
Ann R. Suding
Partner, Accounting Advisory