Any investor or company that has gone through the acquisition process knows the amount of time and effort it takes to get to close. A process so long that closing day feels like the finish line. However, closing day is just the beginning. The integration of the newly acquired entity into the existing processes and procedures of a parent company or platform is crucial to recognize the full potential of the new acquisition.
Discussed below are 4 keys to consider when integrating newly acquired entities:
1. Plan Fast, Implement Slow
It is easy to want to integrate the new entity onto all the appropriate systems on day one. However, moving too fast without proper processes in place leaves room for more error and headache. Instead, take the time to make a clear plan for the short and long term. For example, if you plan to change the invoicing and billing system your new acquisition uses, you may need to continue using the old system for an extra month to ensure a smooth implementation of any new invoicing, accounts receivable, and accounts payables processes. Similarly, when migrating to a new accounting system, ensure that the proper procedures, integrations, and data flow are in place before going live.
2. Align Policies and Procedures
It is important to make all accounting processes, systems, and timelines uniform between the newly acquired entity and the existing one. Not only will this allow for the business to function smoothly, but it will also allow for more accurate and efficient financial reporting.
If your financials are on an accrual basis, it is beneficial to align invoicing policies to provide more accurate revenue recognition. If differences exist between entities on when invoicing occurs, and what periods invoicing applies to, it is recommended to align both. Also make sure policies such as deferred revenue and percentage of completion are properly implemented.
Regarding the bill pay process, we recommend creating a general accounts payable email account (e.g. [email protected]) in which all vendors regardless of entity will send bills to. Next, designate a certain day each week when bills are entered into the accounting system and unpaid bills are sent to the appropriate personnel for payment approval. Designate another day each week on which bills are paid.
Regarding payroll, we encourage our clients going through acquisitions to align payroll pay dates between all entities and to even take it a step further to pay on the 15th and 30th/31st every month to limit the number of payroll accruals.
3. Prepare for Initial Investments and Costs
Immediately after closing day, investors and acquirers are often eager to implement their new growth strategies into the business. These new strategies may require additional investment, so plan accordingly. Additionally, as the acquiring company, you will immediately be responsible for the expenses of the acquired company. This was likely covered during the transaction process via a Net Working Capital analysis and hold backs, but make sure you have enough cash to cover costs such as payroll, inventory, and outstanding bills post-close. The good news is that while you are taking on new costs, you will benefit from a new customer base and its respective revenue. Ensure that Accounts Receivable is being tracked and collected to the correct accounts post-close.
4. Track Performance
While the goal is to consolidate a newly acquired entity into your current financial reporting, it is helpful to have the option of tracking each entity’s financial performance separately to address the success of the acquisition. Therefore, we recommend using the functionality provided in most accounting software to track revenue and expenses by branch/location. Users can assign each transaction to a location and therefore have the option of running Balance Sheet and P&L reports by entity in addition to consolidated versions. We also recommend creating a formal monthly reporting package that can be used by both management and investors. This will ensure that everyone is aligned on performance, trends, and forecasts.
Our Experience
Throughout 2022 and 2023, CFOx provided buy-side financial due diligence services to an investor-backed landscaping services platform for its acquisitions of three commercial landscaping services companies. Post-close, CFOx has provided recurring month-end close reporting and helped integrate all three entities into the existing accounting processes and procedures of the platform. This work included migrating systems, consolidating payroll processes, and implementing proper accounting policies.
If you would like to learn more about our Accounting Transition and Integration services, please reach out via email ([email protected]) or schedule a call via the Contact Us page on our website.
