Your business has just been acquired by a private equity (PE) firm. Now what? Signing on the dotted line of a sale and purchase agreement is not the end of the story. It's the beginning of a new relationship between your company and the PE firm.
Change is never easy and after selling your business, you can expect to face some challenges and growing pains—the accounting and finance functions are no exception. Given PE firms are focused on creating value, a lot of their actions have accounting implications. In this article, we examine those financial reporting implications and offer some tips for navigating the transition.
What to expect after a purchase by private equity?
- Involvement in day-to-day operations: The level of involvement of PE firms in the day-to-day operations will vary. Some firms are more active investors and others, passive. In the negotiation phase, the fundamentals of post-deal collaboration and alignment on the cadence and form of communication between the two entities should be established.
- Governance: This is a top priority for PE. In exchange for the required investment, PE firms typically obtain one to two board seats to stay more closely informed about business decisions and performance benchmarks. These individuals will bring experience and expertise from other sectors or portfolio companies.
- Some firms may also want you to consider hiring specific people, this may include appointing a CFO or controller to oversee the more complex financial reporting requirements, including yearly and quarterly reporting.
- The 100-day plan: PE firms view the first 100 days as crucial to driving returns and the 100-day plan has become an essential part of their playbook. This high-level business plan identifies key value drivers and creates a road map for how the company will achieve certain financial and operational targets. As part of the plan, PE firms may use tactics like cost-cutting measures, sales force expansion, acquisitions, or expanding into new markets.
How does financial reporting change after purchase by private equity?
The company's accounting, which is now part of a larger portfolio, becomes much more complex post-acquisition. There will be new deadlines for monthly, quarterly, and year-end financial statement close. This may require creating a better financial close process and bringing in new talent.
“These changes are complicated and onerous, and your existing financial team may not have the expertise required,” said Mary Mathews, Partner, Accounting Advisory Services at BDO. “To keep up with the new demands, you may need to bolster the skill set on your team, bring in an outside accounting firm, or the PE firm may choose to bring in financial experts from their roster,” she added.
Accurate, robust, and timely financial reporting is essential for PE firms to make informed decisions about the businesses in which they invest.
Here are three ways a private equity purchase will impact a company's financial reporting
The PE fund will want the investee company to apply an accounting framework that is consistent with their own. For example, Canadian Accounting Standards for Private Enterprises (ASPE) can produce significantly different results than IFRS and U.S. GAAP on revenue and EBITDA. So, if you're not using the same accounting framework for your reporting, the PE firm will struggle with comparison to other investments they are considering.
Acquisition accounting for new and amalgamated companies is complex. The typical structure is a multi-step process that usually ends with an amalgamation with the original operating company. Finance teams that don't typically see this type of accounting on a daily basis will likely need support.
The tactics that PE firms use to create value, can also potentially generate complex accounting issues, including:
- Capital expenditures and related financing
- Investing in different products or services
- Restructuring or additional acquisitions
- Incentivizing employees with share-based payments
Ensure you understand the expectations and the value creation approach in advance so you can prepare your teams.
Preparation can ensure a successful transition
Remember that growth and value creation are the aims of your investors. Post-acquisition, there will be many changes and improvements that can be both exciting and unsettling. Understanding how the new situation affects the accounting methods you use and the stakeholders you report to will allow you to manage these changes effectively. With the proper preparation pre-deal, and open lines of communication post-deal, you can ensure a successful transition into the next phase of your company's growth.
The information in this publication is current as of January 26, 2023
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.