By John Toth
Prior to acquiring a new company, the focus is on due diligence pertaining to technical and financial issues, such as taxes (discussed in my previous blog post, Essential Tax Considerations Before Acquiring a Target Company). At that stage, there is no time to dive into all the details. There is just so much to look at. But, once the acquisition is complete, you get to take a closer look at the operations of the company and every area it encompasses. You also get to meet the full staff of people, who are now your employees. This article will reveal what to expect and how to proceed in those first days of the transition with respect to employees, processes, benefits and HR-type issues, corporate culture, etc.
Lots of changes are inevitable following an acquisition. Open communication will help to ensure a successful transition across the board. This should be done right away, so there are no surprises. I truly believe this is vital to bridging two cultures together. Transition creates uncertainty, and information will help to alleviate this.
Employees, especially the ones who have worked at the company for a long time, are valuable assets. Whether you retain them for the long term or not, you still have to rely on them initially, since they possess a wealth of knowledge, as well as customer relationships. A strategy is needed to hold on to key people, from the executive suite to warehouse administrators, since they all help maintain smooth-running operations.
There will no doubt be adjustments and changes in the corporate culture post-acquisition that people must work through. For example, employees in a smaller, private company setting may suddenly find themselves part of a larger, more bureaucratic organization. In such a scenario, the entire tone of the workplace shifts. It is likely best to find a middle ground, trying to maintain desired aspects of the acquired company’s culture, while shifting the culture where needed.
It is important to evaluate the company’s existing processes—from accounting to shipping to sales. Some things may be going well, the very things that attracted you in the first place. However, there may be some things you did not realize during due diligence and which, if improved, could make a big difference.
If you acquire a larger company, you may adopt their benefits plan. This could work in your favor. But that is not always the case, and it can be a touchy situation for both sides when benefits shrink. I think this is a great example of when communication is extremely important. Keep dialogue open and anticipate what questions and concerns employees may have, being ready with answers.
Although a healthy review of historical tax compliance is part of pre-acquisition due diligence, you can now take it a step further into analyzing tax returns. The structure of the purchase will determine how taxes will be filed going forward, as discussed in our last blog on this topic. If the purchase was a stock purchase, you will continue to file tax returns as they were before the purchase. As a result, you are now undertaking how they applied the tax law and all accounting method choices. It is important to see if you agree with their decisions, or if anything can be done differently, e.g. more efficiently. A potentially big issue can be state filings, as things can fall through the cracks. It is a good idea to evaluate whether the company has nexus in each state in which business is done. Do you have people on the ground in that state? Is there a physical presence/office space, inventory storage facility, or are you just selling goods there? Be aware that each state has its own nexus rules, and should be researched to see if and where you have state tax filing requirements.
This relates back to whether your acquisition was an asset purchase involving assets like buildings, machinery, equipment and intangibles. In this case, you will allocate the purchase price to the assets acquired. You will need to make sure you start depreciating and amortizing items, holding true to the purchase agreement. The IRS will look to see that both sides of the deal are following through with the agreed upon allocation, and it makes good sense to confirm with one another.
Analyze and track any potential earnouts or contingencies that were part of the original sales document. The company purchase price may have been $1 million, for example, but some money could have been put in escrow (as a holdback). This is sometimes the case with a contract-based company, where the customer base could shrink or go away completely, leading to reduced revenue and an agreed upon reduction to the original purchase price.
So, who will oversee the newly acquired company and ensure all these things are addressed during the transition period and beyond? Typically, the management team of the purchasing company is responsible and, ideally, they will work closely with members of the target company’s management team. It is also common to place your own person (CEO) in a key management position from the start, in which case they would oversee the early stages of the transition.
There are many things you can do to achieve the best possible results from an acquisition. The above items are only a partial list of what might occur and what to watch out for, starting with the transition. To assist with the continuing evaluation of people, processes, tax positions, accounting methods, etc., consider bringing in professional CPAs. Specifically, they can perform your nexus evaluations; analyze your tax positions; and in general, they can act as a valuable consultant, drawing upon their experience inside of client companies and first-hand knowledge of what works and what does not.
Good luck to those of you embarking on an acquisition and the ensuing transition.