Organic growth can take you a long way, but any business with its eyes on long-term expansion is going to be drawn, sooner or later, to the opportunities in the mergers and acquisitions market. For many small and midsize companies in today’s – fingers crossed! – recovering economy, it may be sooner rather than later.
But even the most successful acquisition can stretch a finance organization’s resources to breaking point, and the road to harmonious integration, like the road to true love, seldom runs smooth. Before you plunge into an M&A deal, it’s worth asking: Will your finance people, processes and systems be able to handle it?
Here are three questions for CFOs eyeing an acquisition, and some pointers that can help you find the right answers.
1. Does your transition lead have deep M&A experience? Checklists and written procedures are important, but they’re no substitute for hard-won, hands-on experience. Steering an acquisition calls for a leader with a broad understanding of finance processes and the various forms they can take in different companies – not just the particular company that he or she happens to be working for. It calls for someone with business acumen as well as finance know-how.
While many large businesses can afford an experienced M&A staff, small and midsize firms don’t have that luxury. They may be doing a purchase for the first time. Chances are, they don’t have the right expertise on staff. Or if they do, they’re under utilizing it (and so overpaying for it), because acquisitions tend to be few and far between.
2. Can you handle the operational side of due diligence – and execute after the handoff? You have to do your homework, and it doesn’t end at the purchase date.
Can you move fast enough to get all the info you need from the exiting finance team? Key personnel at the acquired company tend to head for the doors, often before the purchasing company can get a clear picture of how current processes work. It’s a good idea to lay down clear mandates and guidelines for the transfer of this know-how and offer a completion bonus if goals are achieved.
As you head into the integration cycle, inadequate due diligence can result in inaccuracies in the financial statements, tax complications, audit hassles, cash flow leakages, and unplanned working capital infusions. Review your list of vendors and service providers to make sure you don’t get stuck with unnecessary payments. Keep in contact with customers so that there are no delayed or misplaced receipts, and there’s no slowdown in collection activities. Inform the relevant state, federal, and statutory authorities about the change of ownership to avoid fines and penalties. Review the pre-acquisition financial statements to get a handle on goodwill and tax in the post-acquisition period.
3. Can you figure out where your operational processes will easily mesh – and where they won’t? M&A is all about synergies, and your focus naturally will be on creating value by combining business strengths and merging processes. But you can’t afford to overlook areas where synergies don’t exist, or where the acquired company’s processes are very different from yours; for example, it may have a unique set of processes around invoicing. Such areas will likely be the biggest challenges for integration. Documentation is crucial; you’re going to need it when you start mapping and meshing these processes into your current systems.
Companies that lack robust finance and accounting systems are at a distinct disadvantage here. If your accounts payable process, for example, entails a manual paper-based workflow, you could be looking at some real headaches when it comes to adding invoice volume from the acquired entity. If you have a scatter of loosely connected tools, or a system that can’t support a multi-entity structure, pulling data from the acquired company’s systems – which may be every bit as disparate as yours – will be a challenge. Evaluating your own operational systems before acquiring and attempting to integrate a new entity that might break them is a wise course of action.
Even if you’re not in the market for an acquisition right now, it’s worth planning ahead for the day when you find a bargain that you can’t pass up. When you think about it, what kind of organization is best positioned to make the most of M&A? One that’s not tethered to a fixed-cost structure, one that’s agile enough to grab the opportunities, one with a strong foundation of people, processes and systems enabled for growth.
Is your organization there yet?
