Mergers and acquisitions (M&A) involve a complex web of financial, legal, and operational considerations. While the M&A advisor’s role in managing the transaction is essential, accountants also play a crucial role in ensuring financial clarity and accuracy within the process.
Understanding the Accountant’s Responsibilities
Caleb Lloyd, an Accounting Advisory Services Partner at Smith & Howard, emphasizes the accountant’s role in creating consistency. This involves organizing financial data in accordance with Generally Accepted Accounting Principles (GAAP), the standard rulebook.
“If we’ve been engaged for quality of earnings or the financial due diligence, we try to format the numbers to be consistent with what everybody else is used to seeing,” Lloyd said.
Accountants also have the flexibility to make transaction-specific decisions, such as determining Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and handling management add-backs.
One example of management add-backs is excluding the owner’s personal expenses from the company’s expenses to obtain a clearer picture of the true operational expenses.
Accountants also adjust for non-recurring events, like one-time lawsuit expenses, to provide a normalized view of the business’s performance.
Ultimately, the accountant’s goal is to deliver reliable figures. “Our role is really just trying to get numbers following the same rulebook,” Lloyd said, “and understanding how these numbers represent what the core of the business is doing day in and day out.”
The Importance of the M&A Advisor-Accountant Relationship
A strong working relationship between the M&A advisor and the accountant is essential for a successful transaction.
Lloyd describes it as a “three-legged stool” involving the advisor, the seller, and the accountant. This collaboration ensures the financial information aligns with the story the advisor is presenting to the market.
For example, Lloyd shared a situation in which a company changed its customer acquisition strategy, resulting in an impact on revenue and margins. The accountant played a key role in analyzing and presenting the data to support the advisor’s narrative.
“You have to tell your attorney everything,” Lloyd said, “and you have to tell me everything too.”
Effective communication and trust are paramount in this relationship. By working closely together, the M&A advisor and the accountant can navigate complexities, build trust, and achieve the best outcome for the client.
The Critical Role of Due Diligence
Due diligence is a fundamental part of any M&A transaction. Whether representing the buyer or the seller, accountants play a significant role in this process.
While there might seem to be conflicting interests – maximizing EBITDA for the seller and minimizing it for the buyer – the ultimate goal is accuracy. “Everyone loses if we don’t get to something pretty close to a truth we can all agree on,” Lloyd said.
For sellers, aggressive add-backs might not withstand scrutiny from the buy-side. On the buy side, overly aggressive tactics can damage the relationship between the buyer and the seller, especially if the seller remains involved after the transaction.
The accountant’s role also evolves throughout the M&A process. Initially, they often generate the quality of earnings report. Later, they explain their findings and provide support for any adjustments.
Accountants also act as translators, particularly in lower-middle-market deals where the seller may not have a trained accountant on staff.
“One question I love to ask people is, ‘Are you a trained accountant?’ If not, you may not have the vocabulary the buy-side diligence team is going to be looking for,” Lloyd said. “I need to have a different vocabulary so we can get on the same page.”
Uncovering Red Flags and Providing Value
In the sell-side role, accountants not only explain the numbers but also help identify potential issues. This early detection can be invaluable.
“In the sell-side role, information has a lot of value,” Lloyd said. “The question is, who will get value from this information?”
Discovering a problem early allows the seller to address it, or at least account for it in the valuation.
“It’s better for problems to be found in advance than to get discovered later,” Lloyd said. “We may not be able to make it go away, but at least you don’t lose your credibility in the process, and we can help somebody else understand those problems constructively.”
Beyond Due Diligence: Additional Accounting Services
Accountants can also provide other valuable services throughout the M&A process, including:
- Advising on the tax implications of deal structures
- Helping to determine the most advantageous deal structure
- Assisting with the integration of accounting systems and processes post-acquisition
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