Robust controls and financial reporting capabilities quickly add to an acquisition’s value. But private equity firms often underestimate the degree of change required, particularly when it comes to newly acquired small or family-owned businesses. Focus first on these three key areas:
1. Assess the framework for internal controls.
To assess an acquisition’s existing internal controls framework, if one exists, buyers must first identify gaps and opportunities for improvement. Examples of common areas that can often benefit from shoring up and improved efficiencies include inventory management, cost allocation, cash flow forecasting and financial reporting processes. The timing of the buyer’s assessment will be driven by several factors, including deadlines for the next reporting period, for an external audit, or for other reporting requirements.
Once the private equity firm has assessed the existing framework for internal controls and identified areas targeted for improvement, it can begin to build a more robust structure that will better support its needs going forward.
2. Strengthen financial reporting capabilities.
Managers of the acquired business may struggle with the sophisticated, metrics-driven emphasis and reporting methodologies that private equity groups bring. The smaller the acquired company, the less likely that it has been monitoring metrics at a granular level. It may very well lack accurate insights into cash flow, net revenue, selling, or daily or weekly expenses, for example. Improving management proficiency as well as accuracy, efficiency and timeliness of financial reporting won’t happen overnight.
The buyer’s integration and overall portfolio strategies should drive specific improvement efforts. Private equity firms need to consider whether, for example, the acquisition has multiple business units that should be rolled up into one framework for controls and reporting. Perhaps the framework for another business in the portfolio could be applied to the current acquisition.
3. Prepare the finance team.
Some key areas of focus for the team will likely include gaining the competencies to:
- Improve efficiency and timeliness of the financial close
- Prepare monthly reconciliations and financial statements
- Forecast 13-week cash flow and conduct cost analyses
- Prepare accurate budgets
- Better understand purchase agreement compliance
Less sophisticated finance teams may need some guidance and support. Private equity firms can bring in their own finance resources or enlist expertise from a third party. Ultimately, the finance team, regardless of its composition, should do more than just facilitate reporting; it should have the acumen to glean insights that further improve efficiencies and add value.
Strengthening internal controls and financial reporting capabilities needs to be a crucial early part of every integration. Even the best-laid integration and value-creation plans falter without a clearly detailed picture of the acquisition’s financial performance. Focusing on the controls framework, reporting capabilities and the finance team gives buyers a head start toward success.
