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After the Transaction: Look Here to Unlock Value in Post-Merger Integration

Jul 7, 2023

Congratulations! After navigating the five stages of the transaction, the deal finally closed. Now it’s time to get down to the job of consolidating operations.

Whether you’re an owner who is staying onboard or you’re another member of executive leadership, your role in post-merger integration is an important one. You deserve a pat on the back for getting through the grueling months of due diligence. But integrations can have just as many landmines (especially if certain things were overlooked in earlier stages) and with potentially more severe financial consequences.

Proactive integration planning, on the other hand, can help you unlock the added value your new owners or investors are looking for — while making the process as smooth and painless as possible for you and your team. You just have to know where to look.

Accounting Basics

In the avalanche of documentation that is financial diligence, it’s easy to get lost in the details and let certain fundamentals slip. For example, buyers commonly operate on the accrual basis of accounting, while the companies they acquire often use cash basis. For certain companies — such as a service-based business — this might be a detail that is easily handled after the fact. But for manufacturing and other inventory-intensive businesses, inventory counts must be performed on the date reflected on the balance sheet. And that means that having an opening balance sheet that is ready to be audited on Day One of the merger requires planning in advance of the closing itself. If the buyer fails to grasp the importance of having accurate inventory counts on Day One, it might be a good idea to involve the transaction advisory services team to help them understand the impact.

If you discover such accounting oversights during the integration phase, it’s not too late. But the sooner you address accounting fundamentals, the quicker you’ll be on your way to audit-ready financials.

Employee Retention

Employee retention is one of the biggest risks for buyers as well as one of the biggest determinants of post-merger integration success. At the end of the day, merger success often comes down to keeping employees vested and motivated to help achieve future earnings goals.

For example, imagine you’re a manufacturing company with only W-2 employees, and you acquire an engineering firm that is a partnership. How do you compensate those engineers in a way that is equitable with your other employees and also incentivizes them to stay on your team rather than defecting for a firm where they can go back to being a partner?

Another challenge that often presents itself in transactions is what to do with 401(k) or other benefit plans. The treatment of these benefit plans differs depending on whether the acquisition is a stock purchase or an asset purchase, and the two different types of acquisitions pose very different risk and integration challenges for the buyer.

Ideally, designing the new compensation structure should happen in parallel with financial diligence, since getting it right has a strong influence on the success of the merger. In fact, as part of the quality of earnings analysis, an assessor will often push the new compensation structure back into the last 12 months to give the potential new owners insight into what effect the new structure would have going forward.

Supply Chain Integration

Synergies are crucial to unlocking value after mergers and acquisitions. This can come in the form of office consolidation, removal of certain duplicated employee roles, eliminating other duplicated expenses, or even additional purchasing power that comes in the form of volume purchase discounts.

It pays to inventory both companies’ suppliers and their pricing models in search of lower price points. And remember, the bigger company’s suppliers might not always be the best for the merged company. When it comes to certain critical inputs, the acquired company might have strong vendor relationships with better pricing structures. (And if you can negotiate more-favorable pricing once the merger has closed, that’s just icing on the cake.)

Technology Integration

On the surface, technology can seem like a fairly straightforward integration issue. The acquired company will transition over to the software and platforms already in use by the acquiring company — end of story. Right? In practice, it’s never that simple.

The number one reason for technology integration failures? People. After all, change can be painful.

In many cases, people simply need more time to adjust to the new system and the change in routine. Consider a warehouse manager who is used to an enterprise resource planning (ERP) system that requires weekly reporting, and the new owner’s ERP system calls for daily reports. He isn’t going to be able to change on a dime.

The sooner you tell people what to expect, the sooner they can get over the shock and get on with the process of adapting. To help with the transition, communicate the expected processes and procedures far in advance of the merger date, and then lead by example.

Merger Integration Checklist

Integrations go much more smoothly when they are actively managed by a team that is laser-focused on that objective.

Especially if additional mergers and acquisitions are in the forecast, form a merger integration team with its own checklist of must-do items. That merger integration checklist might include some of the following questions:

  • Are the company’s financ­ials ready to be audited as of Day One?
  • What is our employee retention strategy?
  • Have we designed a compensation and benefits structure that is both equitable and financially sustainable?
  • Have we considered impacts of retirement plans on employees?
  • Have we inventoried the most important suppliers on both sides of the merger to find opportunities to take advantage of better pricing?
  • Have we been clear with our employees about the new technology they will need to adopt and how it will affect their day-to-day lives?

Most merger integration problems can be alleviated by communicating the required changes early and often. Wherever you are in the transaction timeline — whether your company is just testing the waters, in the midst of a transaction, or already in the post-merger integration phase — CRI’s transaction advisors are ready to meet you where you are.

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