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The Role of Accounting in Successful M&A Transactions

November 27, 2023

By Paul Lennick


Mergers and Acquisitions (M&A) can redefine markets, establish new leaders and create significant value for shareholders. However, the success of these complex processes can often hinge on the strength of the accounting departments of the players involved. Here's what you should know about accounting during the M&A process.

Before the Transaction

The foundation of any successful M&A activity is laid well before any contracts are signed or handshakes exchanged. The accounting team spearheads a rigorous financial examination of the target company, a process commonly known as due diligence. This phase is crucial for constructing a detailed and transparent financial profile of the target entity. Here, accountants meticulously scrutinize balance sheets, income statements, cash flow statements, tax compliance records and more, to paint an accurate picture of financial health. Their goals are:

Asset Verification:

They verify the existence and condition of assets, ensuring they are not overstated and are free of liens or other encumbrances.

Liability Assessment:

All current and potential liabilities are uncovered, including contingent liabilities that may not be explicitly stated on the balance sheet.

Revenue Analysis:

They examine revenue streams for sustainability and risks, looking into the quality of earnings, recurring revenue and the accuracy of forecasts.

Expense and Margin Review:

Analyzing historical expense trends and profit margins to understand the target’s cost structure and operational efficiency.

The culmination of due diligence is the valuation – a critical element in any M&A process. Accountants employ a variety of methods to ascertain company worth. Common approaches may include:

Discounted Cash Flow:

This intrinsic valuation method involves forecasting the target’s free cash flows and discounting them to present value using the company’s weighted average cost of capital.

Comparables Analysis:

Here, they compare the target to similar companies in the industry, using metrics such as P/E ratios, EBITDA multiples and others to gauge market value.

Precedent Transactions:

This method looks at previous similar deals to determine a reasonable price range based on what was paid for companies of comparable size and characteristics.

Throughout this phase, the accounting team is not only identifying the potential return on investment but also pinpointing risks and opportunities that could affect the price or the strategic rationale behind the acquisition.

During the Transaction

During the transaction phase, the accounting department is at the forefront, handling every financial detail that enables the deal to proceed. Their tasks include:

  • Transaction Oversight: Accountants monitor the flow of funds, validate financial transactions and ensure the financial aspects of the transaction are executed as planned.

  • Regulatory Compliance: They ensure that all financial activities comply with accounting standards such as GAAP or IFRS, as well as with legal regulations specific to both the buyer's and seller's jurisdictions.

  • The communication aspect is also critical during this stage. Accountants must maintain transparent dialogue with all stakeholders, providing timely and accurate financial information. This ensures that investors, regulatory bodies and other relevant parties have a clear understanding of the transaction's financial implications.

After the Transaction

During the post-transaction period, accountants play a crucial role in merging accounting systems and processes, ensuring that the financial statements of the combined entity reflect a true and fair view of the new financial reality. They work to:

  • Consolidate Financial Systems: This involves harmonizing accounting policies, integrating financial reporting systems and ensuring that the combined entity can report its financials accurately and in a timely manner.

  • Realize Synergies: Accounting leaders must analyze the combined entity’s operations to identify cost-saving opportunities and maximize operational efficiencies.

  • Furthermore, the accounting team engages in continuous financial oversight, ensuring that the combined entity adheres to the financial targets set out in the investment thesis. They provide ongoing analysis and insights that are critical for strategic decision-making, thus ensuring the M&A delivers the intended value.

Why A Strong Financial Team Is Important

A proficient accounting department is the linchpin of a successful M&A transaction. Their expertise ensures that from the initial due diligence to the final stages of integration, every financial detail is scrutinized, every risk is assessed, and every opportunity is captured. It is this financial acumen that can significantly influence the trajectory of growth and the realization of strategic objectives post-merger.

Recognizing the value of a strong accounting team is not just smart—it's indispensable for M&A success. However, hiring a large internal team of full-time accountants to handle all of this additional work might not be the best strategy for every organization. Outsourced service providers can support organizations by providing expertise and manpower when it’s really needed.

Quatrro Business Services (QBSS) stands at the forefront of finance and accounting outsourcing, redefining industry standards through tech-enabled solutions and expert teams. With QBSS, your business gains the leverage of world-class expertise and the assurance of a partner who is as invested in your success as you are. Embark on your M&A journey with QBSS and 'Get More to Go On' — more insights, more efficiency and more growth potential.

Paul Lennick
Written by
SVP M&A Services

Paul, as the SVP of M&A and Private Equity at ContinuServe, a subsidiary of Quatrro BSS, spearheads ContinuServe's global strategy, team leadership, and operational management for its M&A business, focusing on its carve-out practice. Leveraging expertise in consulting, private equity, and client service, he focuses on driving IT and back-office value creation through outsourcing and optimization.

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