As M&A transactions grow in complexity, the role of accounting and valuation professionals in the early stages of the acquisition process has become a key driver of value.
Engaging accounting advisors early in the deal life cycle helps acquiring companies navigate complex accounting standards and address financial reporting requirements after the deal closes. Their guidance helps ensure the transaction is set up for long-term financial success and provides a strategic advantage by addressing potential accounting issues before they become problematic .
"Companies can get caught off guard by the accounting impact or terms within their deals, and once the agreement is finalized, there is little that can be done without significant amendments. This proactive approach enables us to provide tailored guidance on key considerations that may impact the transaction," adds Mathews.
Building on this foundation, a Chartered Business Valuator can provide key insight into the determination of a reasonable purchase price for a target company. By identifying underlying value drivers and ensuring that potential value and risk are appropriately assessed and leveraged during negotiations, a valuator can provide buyers with the information they need to effectively navigate the deal process. Further, they can offer guidance on how to structure the deal to minimize future financial risk, which can prove extremely valuable to existing stakeholders.
"Buyers are then better equipped to avoid overpaying for a target and prevent costly delays and distractions later on," says Mistry.
Accounting and business valuations work in tandem to contribute to a more efficient and predictable acquisition process. Not getting both teams involved early can result in bottlenecks and missed opportunities during critical phases of the deal.
“Juggling post-acquisition integration with year-end reporting creates a demanding environment for companies. That's not the time to be deciding which professional advisors to engage or addressing unexpected challenges,” says Mistry.
Client story: Strategic value through early advisory
A recent BDO client engagement highlights the transformative impact of early valuation and accounting advisory.
Our team was engaged to provide post-acquisition assistance on a client’s recently closed deal, one which had a complex—but increasingly popular—structure, including both an earnout and rollover equity component. A highly acquisitive and fast-growing company, this client was in the early stages of making another acquisition.
During our analysis, we brought attention to certain attributes in the client’s existing ownership structure that had arisen from how the previous deal was structured. Our involvement highlighted crucial valuation considerations for both existing and future stakeholders, allowing the client to ensure similar complexities were carefully analyzed in future transactions.
“This is a practical example of how engaging us in one deal highlighted the need to bring us in before the next deal closed, in order to keep all stakeholders informed and aligned,” says Mistry. “We can identify factors that may impact the deal structure and advise the client on key considerations from both a financial reporting and business operations perspective.”
Five accounting and valuation considerations pre-deal that can enhance deal value
Businesses typically look at the purchase price allocation (PPA) post transaction, but a pre-transaction or pro-forma PPA has benefits for strategic decision-making in M&A and anticipating the effects of an acquisition on future financial statements and deal structures.
A common observation is that certain elements of the purchase consideration may not be clearly defined. For instance, vendor remuneration included in the deal could be classified either as part of the purchase consideration or as an expense. Such factors influence the final determination of what will be included in a PPA, and a pre-deal PPA identifies and addresses these complexities early.
By considering the accounting treatment and implications of earnouts early in the acquisition process, buyers can establish clearer terms, manage expectations, and reduce the risk of disputes post-acquisition, laying the groundwork for stronger post-deal integration and alignment.
A common oversight in acquisition earnout calculations is the buyer’s misunderstanding of the seller’s numbers and how they’re calculated under GAAP, which can ultimately cause disputes down the line. For example, purchasers often mistakenly tie earnouts to metrics that are not directly relevant to their business or are subject to interpretation, leading to unexpected impacts on future cash outflows.
Another area that is often overlooked arises when earnouts are tied to share-based consideration. In these cases, buyers must carefully assess the fair value of the shares at the time of the deal and consider their potential dilution effect on existing stakeholders.
Clearly defining these metrics upfront ensures that financial expectations are aligned and prevents ambiguity.
Identifying and accounting for assets with significant fair value implications can prevent unexpected impacts on post-deal financial performance. Adjustments to inventory and deferred revenue, in particular, can have substantial downstream effects on financial performance.
For example, acquired inventory is often written up to fair value at the time of acquisition, which can impact gross margins in future reporting periods as the higher costs flow through the income statement. Similarly, deferred revenue is typically reduced under IFRS or ASPE, resulting in a lower revenue base post-acquisition compared to the seller's historical results. Proper accounting for these items is essential to accurately project post-acquisition performance.
The identification and valuation of intangible assets such as intellectual property, customer relationships, and brand equity is a nuanced process that requires advanced methodologies. Certain intangible assets may have tax implications, which can affect the overall financial structure of the deal. Identifying and valuing these assets pre-deal ensures they are accurately reflected in the PPA and integrated into the financial model.
Pre-existing agreements, such as employment contracts or service agreements, can significantly impact deal value if not thoroughly analyzed during due diligence. Failing to account for these obligations in advance can lead to unexpected liabilities and compliance challenges post-close.
How BDO can help
At BDO, our Accounting Advisory and Valuations & Modelling practices collaborate closely to identify issues that may arise both before and after an acquisition.
Our team thoroughly assesses the current accounting and valuation status of the target acquisition, identifying any gaps and offering tailored solutions to address them. We provide independent guidance and suggestions, leveraging comprehensive data analysis to develop effective solutions that align with your strategic goals.
We seamlessly integrate other professionals and service lines as needed, ensuring a holistic and efficient approach to addressing your needs. This collaboration empowers you with the insights needed to make informed decisions during the pre-deal phase and enhance value throughout the deal process.
The information in this publication is current as of Jan. 28, 2025. 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.