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Understanding the Role of Business Accounting in Mergers and Acquisitions

Buying or selling a business can be more complicated than buying or selling other assets. Real and personal property is easy to value — These assets have a market price shaped by supply and demand. To some degree, this carries true for businesses as well, but the pricing is not as straightforward.

Businesses have a lot of moving parts, and you need to take them all into account before you buy or sell. You must consider the business’s assets and liabilities, but you also need to consider its strategic fit with the buyer. Businesses are worth different values to different buyers. On top of that, you need to consider cultural fit, organizational alignment, and other unseen elements.

To get through an M&A deal successfully, you should work with a specialist who can guide you through the process. Here’s what you need to consider.


ASC 805 Business Combinations

To ensure you account for the merger correctly, you need to work with an accounting team that understands ASC 805. This part of the code outlines the Generally Accepted Accounting Principles (GAAP) for business combinations. Using this guidance, your accountant will determine if they need to account for a merger or the assumption of assets and liabilities.

There are very specific guidelines that outline whether something constitutes a business combination or the purchase/assumption of assets/liabilities. For example, say you’re buying a building with a lot of manufacturing equipment. Does this mean that you’re buying a collection of assets? Or are other elements involved that constitute the purchase of a business? This is a critical distinction to make because it dictates the accounting process.

Ideally, you shouldn’t address this issue after the merger. Instead, you should think about the accounting implications as you navigate the transaction. When you have an accountant guide you through the acquisition process, they can let you know the best way to approach and structure the deal. This includes shaping the deal around your budget, but it also includes understanding the short and long-term accounting implications of the transactions.

Navigating Financial Challenges

3 executives exploring accounting for mergers and acquisitions

Both the buyer and the seller will face financial challenges during a merger and acquisition. The seller needs to ensure that they are assigning the optimal valuation to their business. This includes narrowing in on the right reference number. While most businesses use EBITDA as a starting point, there is a lot of subjectivity about what should be added to or from this number. Then, of course, the multiplier, while greatly affected by market factors, is also subjective.

On the other side of the table, the buyer needs to ensure that they are using the optimal numbers when evaluating an acquisition target. A buyer should never just take the seller’s sticker price. Instead, they should work with an experienced accountant who can help them structure the deal in the most advantageous way possible.

As you know, not every M&A deal is a buyout. In some cases, the target’s owner may stay for a certain amount of time. This arrangement generally comes with performance incentives that affect the final cost of the transaction. This can be challenging if not handled correctly.

Ensuring Accuracy and Compliance

During a merger, you have to think about countless different elements. The buyer needs to consider how the target complements its current offerings. For instance, are they investing in the company because it expands their geography, adds to their product lines, gives them access to intellectual property, or for some other reason? The seller needs to think about how they want their business carried on. Both sides need to consider cultural and operational compatibility.

However, while critical, those elements are never as important as the numbers. Regardless of which side of the deal you are on, you need accurate numbers. If you’re selling, you need audited financial statements, but of course, if you’re buying, you need an independent party on your side to review the financial documents. You also need someone to help you understand how the merger will affect your accounting processes and tax liabilities.

Optimizing Financial Reporting

Financial reporting is key during a merger or acquisition. Identifying the assets and liabilities is key during this process. They tend to make up a significant portion of the company’s value, although that can vary depending on the structure of the sale and the other benefits offered by the target.

However, you can’t necessarily just rely on the target’s balance sheet. One, you may need to reassess the value of certain capital assets. It’s common for assets to have a different carrying value than noted on the balance sheet, simply due to a lack of updates. Additionally, the target company may have goodwill or other intangibles that are not accurately reflected on the balance sheet. An experienced M&A specialist can help you ensure that these reports are accurate.

Mitigating Risks

There is a lot to consider when buying a business. From a financial perspective, the biggest risk is overpaying for a target acquisition or selling your business for less than it’s worth. Tragically, sellers sometimes walk away from their life’s work for millions less than they could have gotten because they didn’t work with a specialist.

Buyers tend to be less likely to suffer the consequences of a poorly structured deal, but that’s only because many buyers in this space are very experienced.

executives are in consensus about accounting for mergers and acquisitions

Inexperienced buyers often risk overpaying for businesses. Accurate financial records and working with someone who has your best interest in mind are the most effective ways to mitigate these risks.

Reach Out to DHJJ for Help!

Whether you’re buying or selling a business, our business accounting specialists can help you. We can provide audit and assurance services for your financial documents, help you value the business, and guide you through the accounting process before, during, and after the deal.

Are you ready to sell and move to the next stage of life? Interested in acquiring a business? Then,

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