Michael’s M&A Playbook: 5 Tips for the Alignment of the Management Reporting System
After you acquire another company, it is crucial to start as soon as possible with the alignment of the reporting. This is sometimes difficult because reporting systems and types of management reporting can be very different between the companies. The integration begins with the accounting standards, continues with the reporting of actuals with a comparison and variance analysis to plans, and also includes forecasting and budgeting. Here are five tips and best practice examples from my M&A transactions to make the transition easier for you.
Tips for Better Management Reporting in the Post-Merger Phase
Define the timing of the IT integration. The sooner you can roll out the ERP software and other tools, the easier the integration of accounting, reporting, and planning processes. That said, it may not be necessary to do this immediately. For example, if you intend to run the acquired company at the beginning separately and then integrate it, it gives you more time to set up the IT integration. I have seen this approach especially in M&A transactions where the goal is to expand the product and solution portfolio (and the tools and processes are very different in the target company).
Align significant accounting policies. This is an absolute must to be compliant from an accounting perspective. Focus on the big topics at the beginning and address smaller issues later. Remember, you need to be "materially" OK and not with every dollar. I recommend that you analyze already during the due diligence phase where your accounting policies differ. The balance sheet is full of estimates, so ensure you understand the allowance for bad debt, inventory valuations, useful lives for non-current assets, discount rates for future liabilities, etc. You need this information for the business case, the opening balance sheet, the purchase price allocation, and negotiations of the working capital adjustment. Use external accounting firms to help you with that task.
Set up templates to integrate management reporting. The rollout of the IT systems takes some time, but you need to ensure that you can start with your management reporting from the beginning. To achieve this, you can already develop integration templates during the due diligence phase that will allow you to include the information from the acquired company. Ensure that you have a good combination of financial, operational, and strategic indicators as well as leading (predictive) and lagging (historical) metrics.
Include operational key performance indicators (KPIs) and value drivers from the target company. These KPIs will help you better understand the leading (predictive) indicators of the business. If the target is in the same or similar industry, you want to use operational KPIs from your company. If you expand your portfolio, they may differ, but make sure you use the same KPIs for the due diligence, business case, and then later in the post-merger phase. Otherwise, you will have problems comparing your results. Value drivers are more strategic than operational (tactical) KPIs and help you with long-term and value-based planning.
Align the reporting calendars and focus on critical reports. Get details about the target's reporting calendar during the due diligence phase. If you have already optimized your monthly closing and reporting calendar, it may be challenging for the target company to follow this schedule. For example, reducing the accounting close by a few days may take a couple of months. Having the accounting results later most likely also means that the information for the management report comes later. A solution is to introduce a two-step management report: You start with the regular reporting and add the target's information later in the month. Also, don't try to solve all reporting issues right at the beginning. Define a clear path for all reports, but make sure that you prioritize. First, start with the financial reporting of the income statement, balance sheet, and cash flow. Then continue with the management reporting that includes a variance analysis of actuals to forecasts and budgets. Include other critical tactical and strategic KPIs.
Start with the Basics
From my experience, companies want to solve too many topics right at the beginning of the integration. A more realistic and successful approach is to develop a well-defined integration plan that follows priorities. For the management reporting system, align first the financial reporting (i.e., income statement, balance sheet, and cash flow) and management reporting (i.e., financial and operational KPIs with a variance analysis to plans). The rest can follow later. For business case updates, read my tips here. There are other things that you can do, but those tips will make your reporting integration easier.
Feel free to contact me to discuss specific mergers and acquisitions examples.
