Private equity firms experience many problems in the post-acquisition period. The portfolio company is acquired, but now what? How do you turn the company into a money-making machine that will eventually result in a satisfying ROI?
Out of the many things that you can do, we wanted to focus on one thing in this article. We wanted to focus on real value creation in the post-acquisition period.
The main problem here is that many private equity firms do not fully appreciate that financial reporting is a vital part of this. To create value after an acquisition, you need to upgrade the financial reporting processes in the acquired company.
In our experience:
- Many private equity firms omit the fact that upgrading financial reporting is a big part of post-acquisition value creation.
- An even bigger number of companies appreciate that upgrading is necessary, but they rarely understand to what degree.
To help you with this, we wanted to focus on three primary ways through which you can get real post-acquisition value creation. Let’s take a look at what you need to do.
1. Thoroughly assess the internal controls of your acquisition to determine the right type of finance & accounting infrastructure
Private equity sponsors expect rigorous reporting from their portfolio companies from the very start, but many of these companies:
- Are not able to meet these standards so early
- Have never had a major external audit (usually performed by a large or regional accounting firm)
The management of the portfolio company needs to gather a substantial amount of information for the private equity firm. They are usually unprepared for this. However, the problem also lies in the private equity firm that assumes their acquisition can handle the gathering and analysis of such large amounts of data.
It's precisely for this reason why a thorough review from the very beginning is essential.
While assessing the finance & accounting function, you can get a clear picture of the state of your acquisition’s internal controls structure. The evaluation can reveal several areas of improvement and what can be done:
- Ways for allocating the costs
- How to improve the cash flow 13-week forecast
- A way to get a multi-deminsional view by product line or location
Additionally, there's a significant potential for finding a way to speed-up the entire financial reporting process for the acquisition company.
However, you need to be prepared for the fact that a full assessment can be rigorous. That will depend on factors like:
- How you address the reporting requirements, which is always different with every private equity firm.
- The date of the latter reporting period.
- How quickly the seller needs to prepare for an external audit.
2. Have the right talent in the team
It cannot be stressed enough how the right talent is crucial for the financial team of any company. That’s especially true with new acquisitions because they tend to have small financial teams that could lack the necessary skills and experience required to provide the results private equity firms seek.
We’ve found that many private equity firms are usually surprised to learn this. They rarely realize that these companies have financial teams that are more focused on bookkeeping than on collecting, compiling and analyzing monthly reports.
To rectify this, you need to opt for one of the two main approaches:
1. If the team is reasonably knowledgeable, they can get the job done. They only need to be sufficiently trained on how to properly do financial reporting for their private equity sponsor. They need to learn some things like:
- How to prepare monthly financial statements and reconciliation statements
- How to prepare budgets that are 100% accurate
- How to prepare a financial forecast
- How to improve the financial close, i.e. its aptness and effectiveness
2. If the team does not possess enough knowledge, you might need to replace them with the right talent. If replacement isn’t an option, you could opt for bringing in outside help. Many strategic PE firms are opt for third-party experts like Consero, who have skilled finance talent to get the job done.
By having a strong finance team in the new acquisition company, you’ll effectively streamline the entire financial reporting process. Additionally, they will also become better positioned to gain the right insights from the information they collect.
3. Learning how to improve the speed and efficiency of financial reporting
In the end, you need to look closely at the actual financial reporting of your acquisition.
We at Consero are well aware that private equity firms have a specific approach that includes:
- A high emphasis on important metrics
- A detailed and specific methodology for reporting metrics
As we’ve already established, most acquisitions are not at the level where they use the same methods and the same focus on metrics. Management will most certainly struggle as they:
- Don’t have the ability to track financials and report the metrics that their PE sponsor wants to see
- Can't provide accurate reports on cash flows, net revenue, and all the various expense metrics
- Can’t provide all the necessary reports in the desired timeframe
This level of proficiency requires time and resources. That's why they have to start the process of improvement as early as possible. You also need to ensure that the management of the portfolio company fully appreciate this.
To find the most optimal way for improvement, you need to find answers to several questions like:
- How many business units does your new acquisition have?
- Can you organize the business units into a single framework for reporting and controls?
- Can you use the existing methods of other portfolio companies to improve the system of the new acquisition?
Once you gain the answers to these questions, you’ll have a clearer picture of how to approach the improvement of financial reporting.
The bottom line
As you can see, improving the entire financial reporting process to create more value from your acquisitions can be much easier than it sounds.
The only important thing you need to remember is that it’s crucial to start everything as early as possible. As soon as the portfolio company is acquired, you need to begin the process of improving financial reporting proficiency.