Accounting issues play an important role in corporate transactions, and sustainability (ESG) is also increasingly coming to the fore.
If the acquisition or sale of a company or shares in a company is intended, the acquirer and the buyer face major challenges – both before, during and after the transaction. Capital Markets & Accounting Advisory Services advises on accounting and reporting issues in the context of corporate transactions and keeps an eye on ESG criteria along the entire deal lifecycle. This applies to both corporates and private equity (PE) firms.
Through our early analysis of the expected effects of complex contracts and transactions on balance sheets and KPIs, we give you planning security.
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What this means for the acquisition of a company in practical terms
Structuring, accounting due diligence, accounting at the time of acquisition
Accounting effects of an acquisition are not always transparent for the buyer. The terms of the purchase agreement, business transactions of the company to be acquired and other influencing factors often lead to unexpected and unplanned results during the initial consolidation. Unwanted effects on the balance sheet structure and KPIs can occur, resulting in negative consequences for a company's financing conditions or share price, for example. Systems and processes of the target company must be integrated. An important question is also how the company accounts for the purchase price in the balance sheet and how the purchase price affects the consolidated balance sheet.
ESG diligence and reporting
ESG criteria can become a key value driver in company acquisitions. After negotiations, the investment may lose value because national and international sustainability guidelines have not been met or the business activities are subject to structural changes that do not readily ensure future competitiveness. On the other hand, hidden ESG value creation opportunities may be uncovered that can add value to the investment itself or to the acquirer's overall portfolio. ESG diligence identifies key ESG criteria and value creation opportunities early in the transaction process, determines ESG positioning within the competitive environment, and considers the effect on the investment's financial KPIs. The results of an ESG diligence can thus be used in negotiations to achieve a purchase price/multiple adjusted for ESG opportunities and risks, and negative surprises in the return analysis can be avoided afterwards or the full potential can be exploited.
After the transaction has taken place, the acquired company must be integrated into the company's own ESG strategy and the insights gained during the ESG diligence must be implemented in an ESG roadmap so that the value creation opportunities uncovered can actually be exploited. This also includes implementing robust and regular ESG reporting, i.e. definition, measurement, and reporting of KPIs so that positive development can be evidenced.
Post-merger integration and conversion
After an acquisition has taken place, the accounting effects identified as part of the purchase price allocation must be recorded in the accounts. In the case of a company acquisition, the accounting of the acquired company must typically be adjusted to the accounting of the new parent company (e.g. to IFRS), and the company must also change its processes for preparing the financial statements. Even if the acquirer and the acquiree already use the same accounting standards (for example, IFRS), adjustments may need to be made to the acquirer's specific accounting policies for different accounting choices or methods. In addition, the acquired company must be integrated into the reporting system of the acquirer. The requirements are usually high, and there is often a lack of in-house resources to tackle the sometimes complex accounting issues in what is usually a very tight timeframe.
What this means for the sale of a company in practical terms
There are many reasons for selling companies or shares in companies – from streamlining the group portfolio of non-core activities or unprofitable business areas to the exit of a PE company from an investment. The exit can take the form of a sale to an investor (M&A transaction) or an initial public offering (IPO or spin-off). Often, the business unit to be sold is so integrated in the group that a carve-out must be carried out in advance.
Here, too, accounting issues arise time and again, especially in the context of carve-outs.
Carve-outs
In practice, carve-outs can be extremely complex, depending on the extent to which the business unit to be divested is embedded in the group. There are also many accounting issues that need to be considered in order to successfully execute a carve-out. Historical financial information must be compiled, which means that the financial history must be prepared and analyzed prior to the carve-out. In particular focus here are the quality of existing financial information and performance relationships between the company/company share to be sold and the parent company, as well as jointly used assets and liabilities. Carve-out financial statements in accordance with IFRS, US GAAP or other recognized accounting standards as well as audit-ready documentation on carve-out issues for the purposes of the financial audit must be prepared.
ESG Vendor Diligence
ESG criteria can also become a decisive value driver in the sale of a company and have a major influence on the selling price to be achieved. The seller should use ESG positioning to strengthen its own reputation and attract investors. In order for ESG to be used transparently as a value driver in negotiations, the development of ESG criteria and the corresponding influence on financial KPIs must be prepared at an early stage, integrated into an ESG exit story and a suitable ESG factbook created. The ESG argument can justify a much higher sales price/multiple, provided that robust data can be presented, and will be an integral part of negotiations in the future.
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