In a recent blog, Josh Edwards mentioned that it’s easy to overlook transition plans in the busy weeks after an acquisition. Senior staff members are setting the direction for the new business while they manage the details of day-to-day operations, and everyone is working hard. All too often, departments postpone tasks that aren’t required immediately, with the intention of handling them later, and finance is no exception.
After an acquisition, the CFO is often occupied with high-level strategic planning, and the accounting team is often just trying to survive through each month-end close. In addition to daily processes, they may be tasked with preparing new financial reports for the board or outside investor group. They may deploy a new accounting system and spend hours in training for the new system. The to-do list may seem endless.
So, with the CFO working on long-range plans and the controller focused on helping the team survive day-to-day, who is going to handle the acquisition accounting? Many companies will put the acquisition accounting on the back burner and plan for the in-house staff to handle it, relying on the measurement-period language that gives companies some time before they are required to finalize the related accounting. All too often, however, when it’s time for the year-end close, the acquisition accounting still has not been finished.
It doesn’t have to be that way. With the right resources and game plan, the acquisition accounting is something that can be finished during the transition process. The company just has to weigh the importance of dedicating this project to its internal team versus outsourcing it.
The first step is to take an honest look at available resources. Is the internal team able to focus on the acquisition accounting or will they be pulled in on other projects, possibly even other acquisition activities? Too often companies rally the troops to get all this done, only to burn out their best people.
The second step is to assess the depth of the knowledge held by your staff members. Acquisition accounting has specific considerations, and your staff will need to be familiar with the consequences of the deal structure and the decisions the company makes.
Taking a realistic assessment of your team can help you decide if you can accomplish the goal with existing staff members. If you can’t, plan to outsource some of the work. In the long run, outsourcing may save you time, money, and valued staff members.
As you evaluate your staff and their workload, here are several key issues to consider:
When it comes to business-combination accounting, assume nothing. Things are not always as simple as they seem. For example, you may be planning to issue stock options or warrants as part of the acquisition. The individual stock option or warrant agreement, however, may include what is often referred to as a “fundamental transaction.” Because these transactions could result in a future cash payment and not the transfer of stock, you will need to analyze the accounting further.
It’s Going to Take Longer Than You Expect
Understand that the accounting process is going to take longer than you expect. You will be doing a lot of information gathering, which means you will be relying on others to respond to your requests. It’s likely they will have a to-do list that’s as full as yours and will need adequate time to assist you. This may delay your process and plans.
You’ll Need Outside Help with Specific Tasks
Even if the project is managed in-house, it’s likely you will need a third-party specialist. CFOs often sleep a little better when an independent party assists in areas such as establishing the fair value of the intangibles acquired in the acquisition like non-compete agreements and customer relationships.
You Have Other Areas to Consider
Acquisition accounting often brings to light previously unconsidered matters. Here are some common examples:
- Transaction costs that can be expensed for financial reporting purposes may not be deductible for tax purposes. If that’s the case, the newly formed company may operate at a loss for the year but may still pay taxes because the transaction costs are not deductible.
- Success-based fees, also known as finder’s fees, may be limited in their deductibility, regardless of whether it’s a stock or asset sale.
- The acquirer may convert from a pass-through entity, such as an LLC or S-Corp, to a C-Corp. If this is the case, additional attention will need to be given to the change in tax status of the acquirer.
- If the consideration transferred includes an earn-out provision, significant time should be spent to review factors impacting these provisions. Subsequent changes to the fair value of the earn-out provision will impact earnings.
Acquiring a new business is an exciting time for any company, but there are many accounting issues to consider in a business combination. I’ve assisted companies with deals ranging from $5 million to $200 million, and the size of the acquisition doesn’t necessarily dictate the difficulty of the process – planning and execution do. Each deal has its own requirements and considerations, and yours will, too. Regardless of the resources you use, it’s important to allow sufficient time to do the job, ensure you have the right staff on board, and move forward step-by-step.
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