Acquisition Planning and Accounting Best Practices

In 2016, there were 4,951 M&A deals in the U.S., worth $1.5 trillion, representing the second highest annual value since 2001.  And many accountants would agree that one of the more complicated transactions to account for is the acquisition of a business.  However, actually planning for and performing the due diligence and integration for the acquisition, can prove to be even tougher.

Acquisition accounting requires a level of knowledge of the highly complex accounting rules, as well as a thorough understanding of valuation principles and their application, or at a very minimum, an understanding of how to work with a valuation specialist and how to assess the valuation results to determine whether the resulting goodwill balance (or bargain purchase gain) is appropriate.  This can be a daunting task, and inexperienced accountants should be supervised by those with experience in acquisition accounting to ensure they are successfully navigating the complex technical accounting rules as well as accurately applying the overall valuation concepts.  Successfully completing due diligence and integration of the acquisition can be even more challenging, and unfortunately, there are no technical rules to provide guidance.

A few of the most common management pitfalls when completing an acquisition include not performing proper diligence, not having an integration plan, and falling in love with the deal then over-paying for it.

Have an Integration Plan

Have you ever heard anyone say, “why is it taking so long to integrate X Company’s processes into our processes?” or “why do we still have two departments that do the exact same thing?” or “that company is still operating using those old procedures that are causing significant problems for our customers!”  How about this – one of my favorites, “we can’t figure out which department or person will take care of this -- no one seems to know whose responsibility it should be and no one is taking ownership!”

These comments, which are heard too often in relation to acquisitions, are the result of not having an integration plan, or not having a good integration plan.  One of the keys to success is involving a member from each key part of the business.  It is not uncommon for major business lines to be left out of the integration plan, and then, for example, we wonder why we are operating on 50 IT systems five years later, instead of five or 10 IT systems.

Perform Proper Due Diligence

Prior to preparing and executing the integration plan, proper due diligence must be performed in order to successfully identify the issues that need to be accounted for and otherwise managed during the acquisition.  Performing proper due diligence is fundamental to creating a good integration plan.  It should not come as a surprise that involving a member from each aspect of the business is equally important during the diligence phase as it is to the integration phase.  Too often, companies exclude entire functions of their business during the diligence phase.

Another best practice is treating the diligence phase like a really, really detailed audit.  If you’ve performed an audit, one example is to pretend you’re back in your staff level 1 days performing a plant inventory assignment.  Be prepared to do a 2:00am plant tour!  Climb ladders, look in boxes, and ask leading questions of the plant personnel.  You may be surprised at what you find, like “Line 12 never works, there is a heating problem over here, and perspiration causes this, and it’s just a mess…”  Many companies don’t get this involved in the diligence phase, and as a result, they may be faced with significant unknown environmental, legal, or other liabilities after the acquisition is complete.

 

Don’t Fall in Love with the Deal…

If you fall in love, it is almost inevitable that you will overpay for it.  Many of us have often heard comments like, “Oh my word, this deal is going to be so great – it’s going to add all of these customers and grow our revenue exponentially,” and then in reality, earnings targets are repeatedly missed.  Identify your company’s ideal target characteristics, and agree upon them first with the CEO and other senior leadership team members.  As a deal progresses, recognize which positive and negative characteristics it meets, and avoid over-paying for a deal that doesn’t line up with expectations.

Amanda Shepherd, Product Director, Loscalzo Institute, A Kaplan Company

Loscalzo Institute, a Kaplan company, will offer a course that covers the basics of acquisition accounting and valuation principles, guiding the participant through the major steps in an acquisition, including a collection of best practices from CFOs, accountants, and lawyers that have led many acquisitions.  This course will teach M&A leaders how to successfully complete due diligence and integration for an acquisition, and help them avoid common pitfalls that can easily derail the acquisition.  The Acquisition Planning and Accounting Best Practices 1-hour breakfast session at FEI’s CFRI conference in New York on November 14, 2017, provides a preview of some of the best practices included in this 8-hour course, and is a must-attend for anyone who may be involved in completing an acquisition.