Acquiring a Business: What To Consider?
The Merger & Acquisition (M&A) of a business is a common method to expand your existing business’ revenue base. Many companies refer to M&A to increase their market share in the industry, or to strengthen their current business operations.
What should management look out for when acquiring another business?
Consolidate the required financial statements
The newly acquired business will run as an individual unit, separated from the owner’s existing businesses. Hence it is – and should be – accounted separately, using its previous accounting system and staff.
There are important advantages, in terms of administrative, morale-boosting and liability arrangements, in allowing the new acquisition to account for its own expenses, transactions and sales.
However, in terms of tax calculations, there are standard practices of financial reporting for banks and bonding companies, which must be followed. Hence the new owner would also need to have a consolidated record of accounts of all his/her businesses, existing and new.
This will involve refiguring the value of assets and liabilities under the new owner based on the date of the M&A. After considering these revised values in the consolidated records, the remaining intangible value will then be considered as ‘goodwill’, which becomes a fixed asset in the same consolidated records.
In general, the ‘goodwill’ account will not be questioned when all the financial records and necessary accounting documents, from the M&A to the operation under the new ownership, are thorough, accurate and complete.
Maintain confidence
Though it is tempting to spread the exciting news of a purchase of a business, it should not be prematurely announced. The purpose of a purchase and any details of the transaction should be kept in the strictest confidence, kept only amongst those who are directly involved in the M&A process.
Employees do not usually share the same sense and enthusiasm as the new owners; they might be worrisome, and would start making rumours and gossip from their own perspectives and speculations of various ‘what-if’ possibilities. When such false information becomes a public relations issue, unnecessary time and effort would be wasted to mitigate any damage and its ripple effect, such as causing unrest amongst the customers, suppliers, lenders and bonding companies.
Keep in mind that public relation matters can do more harm than good when not handled properly.
Mark the dates
The closing date for an M&A is the day when the papers are signed and the control of the business is transferred to the new owners.
However, in the accounting perspective, the closing date may not be that obvious as the closing process may continue for another year, since additional accounting evidence may surfaced immediately after the M&A, which could impact the transaction.
Hence it is important to continue consulting the accounting and tax expert in the first following the M&A. This will help the owner avoid unnecessary costs later as these people will be making provisional entries that are the official representative of the same owner’s remaining assets, revenues, expenses and liabilities of the following year after the M&A.
Accounting for the purchase
The buyer, while keeping the M&A confidential from the employees and other stakeholders, should be as transparent as possible to the valuation and legal experts, as these people are the primary resources for the M&A process.
On the other hand, the buyer should also be aware of the quality of support these professionals should provide; an oversimplified advice on an M&A related decision should be a red alert.
Valuation, accounting and legal experts who are experienced in M&A and business valuations have the unique knowledge and skills to help ensure a smooth and proper transaction.
M&A are exciting opportunities for business growth and expansion. However, the transaction – the processes and procedures – can be overwhelming and terrifying, especially with construction businesses where one needs to decide on the proper support and resources to handle the technicalities of legal and financial matters.
Hence it is always the best practice to engage a team of professionals – valuation, legal and tax – as early as during the initial ‘shopping’ stage. Read here on basics of valuing a business in Singapore. If you are thinking of buying a family-run business, have you checked that the business has considered these issues?
Read this article to learn about 5 mistakes when selling a business or the top reasons to do a business valuation.
Speak with a valuer specialised in the field of mergers and acquisitions.
