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.