2018 Fall issue of Horizons

Cash should be monitored closely in post- acquisition. To ensure an accurate cash balance, consider implementing a check writing system in which two signatures from higher management are required for checks above a certain dollar threshold. Also, if it is not already being performed, a monthly cash reconciliation should be performed to ensure the cash balance on the company’s books matches what is in the bank account. Proper asset management will help prevent post-acquisition failure. Financial Controls Financial controls can often be overlooked as part of M&A transactions. When companies are merged or grow larger through acquisitions, old internal control systems are often rendered useless due to the scaling of the new business. Maintaining an effective internal control environment is key in limiting risk and exposure to potentially fraudulent activity that would adversely affect a transaction. As part of the transition, leveraging the larger staff of the acquirer (especially in the accounting function) may help strengthen the segregation of duties to further prevent and deter fraudulent activity. The segregation of duties is an important aspect of financial controls. Within an accounting team, ideally separate people will maintain the payables, payments, purchases and receivables. When segregation of duties is not present, one can commit fraud through setting up phony accounts and paying him/herself. Employee Transition Through business acquisitions, some jobs and responsibilities are created while others are lost. It is advisable for the acquirer to continue with its standard on-boarding process for all new employees, including those that are transitioning over from the acquired company to make sure those employees meet the acquirer’s standards.

It is important for the acquirer to establish effective internal controls for all employees to limit their exposure to information and processes susceptible to fraud. Since many business acquisitions happen with small to medium sized businesses, the acquirer could effectively employ the use of earn-outs, bonuses or employment contracts to retain key members of the management team. This would allow the acquirer to incentivize transitioning to the new company and help it succeed in its first few years. However, the payment structures can be complex, subjective and require a great deal of judgment. In order to mitigate post acquisition failure, incentive compensation calculations, key impacts and areas requiring accounting judgment should be critically analyzed. Culture Integration Cultural integration goes hand-in-hand with the employee transition phase. Cultural integration cuts to the core and asks “Does this make sense?” and “Does the acquired company fit within the culture and dynamics?” Workplace culture in the modern business is a main driver behind talent acquisition and retention. Employees are not afraid to vote with their feet and move on to work somewhere else believed to be a better fit. With all the M&A transactions that occur in the marketplace, it is easy to forget that cultures matter. If two firms are merging that do not share a common culture, whether it is dress code, office socializing, etc., it can lead to post-acquisition failure.

Cultural integration often comes down to one factor – communication.

As businesses grow through mergers and acquisitions, it is so important to stay on top of potential areas of post-acquisition failure. Through good management and the use of an independent, third party to conduct

Seven Susceptible Areas for Post-Acquisition Failure

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