If your private equity firm has recently made a new acquisition, you’re in a critical phase in your business journey. However, it may also mean you’ll run into one of the many common accounting integration challenges in private equity. Unifying two business entities, along with their assets, liabilities and resources, can have a significant impact on your accounting processes.
To create the most value for the future of the enterprise, you need to be aware of the challenges. This will help you avoid common issues, like not keeping up with financial and operational data, a lack of transparency, limited reporting capabilities or unsophisticated workflows.
Understanding Integration Challenges in Private Equity
Many private equity firms use add-ons to scale their portfolio companies through a ‘buy and build’ approach. Here, existing companies use acquisitions to scale their existing companies. Typically, this involves creating a new business entity structure, or a chain of holding companies known as stack entities.
When acquisitions aren’t effectively managed, the deals can actually erode your returns rather than increase value. That’s why integrating accounting processes is crucial for the success of your acquisition. It includes everything from aligning your software systems to managing any debts and total cash flows.
Financial integration doesn’t ensure that your reporting is accurate, consistent, and compliant with regulatory requirements. It is also vital for strategic decision-making and maintaining investor confidence.
Consolidated accounting processes can streamline your operations, reduce redundancy and inefficiencies, to ultimately save you time and money. Unfortunately, the integration process can lead to a number of accounting challenges.
Common integration challenges
Acquisitions require consolidated financial statements for an accurate overview of your financial standing and performance. Moreover, you need to account for any revenue consequences of the acquisition, such as mandatory dividends, exit fees, share conversions, or interest on any debt.
Depending on the accounting software you use and your financial reporting framework, it can be difficult to consolidate this information across entities. Migrating and integrating financial data across different platforms requires a lot of effort and resources.
In addition, if your finance teams don’t share a similar corporate culture – such as their approach to accounting practices, risk management and internal controls – you can experience delays, inaccuracies, and even potential losses during acquisitions.
And then there’s the possibility of facing compliance issues when faced with new legal and tax jurisdictions.
These kinds of issues can make or break your acquisition – especially when they drag on for months. As such, it’s important to have a coordinated approach to financial integration.
The strategic importance of early integration
Integrating your accounting practices during acquisitions requires a coordinated approach across entities. And that means you’ll need a comprehensive strategy, which emphasizes early financial integration. Given that total integration typically takes anywhere between 90 and 120 days, the sooner your finances are in order, the better.
This will allow you to quickly identify and implement cost-saving measures and efficiency improvements, to ensure that the anticipated value of your acquisition is achieved as soon as possible. Early accounting integration can provide you with accurate and comprehensive financial information, which you’ll need for informed decision-making.
Laying the Groundwork to Prevent Integration Challenges in Private Equity
With a clear and detailed financial integration plan in place, you can avoid the common pitfalls mentioned above. Your plan should address accounting systems, financial reporting, cash management, and debt management.
A great starting point for this is to conduct financial due diligence.
The role of financial due diligence
In terms of PE acquisitions, due diligence is more than just number crunching. You’ll need to pinpoint any differences in financial systems and charts of accounts, and how this impacts reporting and compliance requirements. By conducting a thorough analysis of the company’s assets (including IP assets), sales, cash flow, and GAAP earnings situation, you’ll gain clear insights into the target company’s financial health, operational efficiencies and legal standing.
It’s also important to assess the internal controls in place in your target company, and ensure these align with your accounting processes, as well as any tax or legal regulations.
Due diligence might be time consuming, but it can save you money in the long run. It can help you determine and fix any accounting conflicts that arise. Once this is done, you can focus on your integration goals.
Setting clear objectives
Clear and measurable objectives are critical for integration success. These should align with the strategic goals of your PE firm.
Objectives should include optimizing operational efficiency, ensuring the integrated entities are compliant with regulations, and outlining expected financial performance.
To reach these objectives, you’ll need to establish clear key performance indicators (KPIs) and milestones for your finance teams. It’s also important to outline a detailed and specific methodology for reporting these metrics.
Of course, this all depends on clear communication of your vision. This includes defined roles, responsibilities and timelines for the integration. Without stakeholder engagement, you run the risk of not reaching your goals.
Best Practices for a Smooth Integration
Once everyone is on board with your vision, the real work can begin. Basically, your goal should be to evaluate the efficiency and scalability of your combined financial processes.
To do so, we recommend developing a phased integration plan. This serves to break down the various steps involved in accounting integration. You could start, for example, by appointing an integration manager within your accounting teams to oversee the process. That will make it possible to map out current systems to identify the gaps and overlaps that need to be resolved. And this starts with assessing your software.
Ensuring system compatibility
The importance of compatible accounting systems cannot be overstated. First, conduct a comprehensive review of both systems to establish if any processes can be merged. It will also help your team to spot any discrepancies or areas that require adjustments, to guarantee seamless data integration and reporting. This also means your team will have to inventory the quality and completeness of all financial data, which may necessitate an accounting clean-up.
Using multi-entity accounting software and automation can help streamline this process, and will let you identify areas for cost savings and efficiency gains, to enhance overall value.
While doing this, remember to document all business-critical processes and systems, and draw up standard operating procedures (SOPs) and workflows for going forward. With these in place, you’ll be able to choose a robust unified platform for your combined accounting.
Change management
Implementing new procedures or software means you’ll need to communicate these changes effectively to ensure your finance teams are on board. Consider providing forms or channels for stakeholder feedback, so that you can address any concerns. Moreover, it’s a good idea to invest in training and support for your finance team to navigate the changes.
If your team lacks the necessary skills and resources, you could hire an outsourced CFO or controller who has experience in these situations to guide them.
Avoiding Common Pitfalls
In addition to the challenges mentioned above, acquiring portfolio add-ons can have significant implications for compliance and regulatory requirements. Neglecting these can open your business up to tax liability and potential audits, legal penalties, and severe reputational damage.
For example, the Corporate Transparency Act (CTA) recently introduced new reporting requirements, specifically targeting the disclosure of beneficial ownership information. This includes disclosing information for all beneficial owners, or those who owe more than 25% of the company. And it needs to be done within 30 days of any changes.
Inadequate resource allocation
If you fail to properly plan and allocate resources during integration, you’ll not only miss opportunities and potentially lose key employees, but it could end up costing you a lot of money. Overall, this can affect immediate post-acquisition performance as well as the long-term strategic positioning of your investment.
Improper planning can lead to financial discrepancies and reporting errors, operational disruptions, increased costs, compliance risks, and can impair strategic decision making.
One way to ensure accurate planning and resource allocation is to consult with a professional.
Leveraging External Expertise
Experts such as tax attorneys or CPAs can give you valuable insights and support during accounting integration.
Fusion CPA has a team of certified accountants and software experts with industry experience who can partner with your firm during acquisitions. That way, you can ensure smooth day to day accounting, as well as optimal software integration for financial success.
We can work with your accounting team on short and long-term projects, and offer strategic guidance and support.
For help navigating accounting integration in acquisitions, schedule a Discovery Call with one of our CPAs.
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