Finance and accounting keys to a successful transaction

Peter Cadigan: Let’s start by talking M&A. We’re hearing the deals that go through have good management teams, solid operations, tight financials and also adjustments that are relatively straightforward. When you’re thinking about the audit season and preparing for an audit, how does that play into what management teams should be thinking about?

Kevin Brady: I mean, it’s funny—it seems simple, but the easiest indicator to see if a company has good management, is operating effectively, sometimes is just the timeliness of how they can provide information. That includes how quickly they can close their books at the end of a month or a quarter or at year-end. That can go a long way to showing that the finance function is operating effectively.

Additionally, how does a company handle significant unusual transactions, specifically business combinations? Because if a buyer is coming in now to a company, they are probably going to be acquisitive in their first few years trying to build the company up and ramp that up.

So can a company’s accounting and finance team handle that? How quickly are they integrating new subsidiaries into their existing systems? How quickly is the opening balance sheet information available and closed out so they can move on to the next transaction in 2025 and going forward?

And then the other thing to consider is not just timeliness, but the reliability of that data. For example, what information management has been providing in their debt covenants and internal reporting to third parties throughout the year.

You want to make sure there are no surprises at year-end and that you don’t want significant audit adjustments. So you want to make sure you’re providing the cleanest data imaginable to anyone throughout the year that is looking at it.

And in addition to that, just the ability to support those EBITDA adjustments that you have within your internal reporting. They’re all entity-specific. Every company has different add-backs that they’re doing, and how easily can you provide that support to someone who’s looking at your numbers and how quickly can you explain it to them? No one’s going to want to sit down with 15 different targets and hear an hour-long explanation of what their EBITDA adjustments are.

So the quicker you can explain those and show to a potential buyer what those adjustments are and that they make sense, the easier the process is going to be for you.

An example I like to use is in the retail space. When we have a new store or multiple new stores during a year, how does management understand the lifecycle of a new store, when it’s going to be fully up to speed and to its full potential? And then are there other investments that go into their other capital projects? Are there renovations? Are there other things that need to be considered in those projections that are going forward?

So just make sure that is all clean, good data and it’s coming in a timely fashion, and that can get you on the right path.

PC: When I hear “clean, good data,” when I hear about reliability and speed to close, the auditor in me thinks internal controls. And I know that may not be the highest priority for our privately held middle market companies. So as we’re thinking about management teams, what would you advise them to think about with regard to controls?

KB: The biggest thing in the control environment is how scalable, how flexible are your controls in terms of can you pull information in an off-peak time that you don’t typically do? Can you do a reconciliation at a month-end when it’s typically a quarter-end or year-end item? Or are you able to pull information mid-month if someone is calling to ask what your AR (accounts receivable) inventory looks like?

Some of the things management needs to consider there that buyers are going to be looking at are really specific to inventory and revenue—two big things in our consumer products environment.

So how clean is your existence information? How good are your controls around there? Are you doing cycle counts? Do you have significant adjustments during your year-end inventory count where you may need to be counting more frequently to make sure those records are clean?

And then if you’re using third-party logistics companies or co-packers, how good is the information you are getting from them? How frequent is it? And is your company able to reconcile—is your team reconciling—that frequently enough to have good records there?

On the revenue side, if you have revenue arrangements with customers that are on a calendar year-end, there is an estimation process that will have to go into play at any quarter-end or month-end that you’re going to need to be able to apply to make sure that you have the right accruals on your book so that a potential buyer knows what they may potentially be on the hook for after a transaction that happens in a year.

Just keeping those things in mind and making sure your team is flexible to do their work in an off-peak cycle is really important to a buyer.