In the ever-changing business world, company mergers and acquisitions have become the usual norm worldwide. In small companies, the distinct structural advantages have led to many innovations and created more value for the business. The growth has also enabled companies to merge with others to enjoy the short- and long-term benefits and built synergies. The same applies to large companies that look for mergers to make on the company's growth engine.
A merger happens when two to more firms combine to form a single company. The firms which are combining can be from the same industry or various industries. The motives behind company mergers may vary broadly, like combining synergies of competing companies in the same sector, a merger between a seller and supplier to reduce the costs and a company in one industry merging with a company in a different industry to reduce the risk and expand product portfolio.
The top management of the companies drives the company mergers after signing a Memorandum of Understanding (MOU) to begin unions with assistance from the banks and advisors. The people involved in the mergers consider all the dealings of both the companies, all the records of books and balance sheets, including assets and liabilities, among other things. Accounting and auditing play a significant role in the process of company mergers.
Importance of Accounting During Company Mergers
Bookkeeping and accounting are the essential functioning elements in an organization. They will provide the business's financial outlook and help the management plan and reach the goals. It should be clean, compliant, easy to understand and follow the best practices as laid out by International Accounting Standards (IAS). The importance of accounting explained as below:
- Accounting forms a basis to begin the process of company mergers. For any successful merger between the companies, the ledgers must be clean with no old balances and adhere to all necessary compliance.
- While merging a part of the business with a prospective buyer, the buyer will require to see the target business's standalone financials. It is enabled only by having a sound accounting system in place.
- During company mergers, the accounting must provide answers to any financial queries raised by the bankers, advisors or legal team. The accounting will play a crucial role in preparing any documents regarding company financials during the merger.
- Confidential Information Memorandum (CIM), a marketing document containing information of all the operations, financials, and the company team presented to interested parties. The accounting team plays a significant role in providing all the historical financial information fairly and accurately. The document will typically include profit & loss statements, capital expenditures, historical tax returns, software licenses and organization charts and other relevant financial details.
- Deal Model, a marketing document prepared for the potential buyer, will project the cash flow and earnings for the next five years. The accounting will provide all the necessary data to prepare the Deal Model document.
Importance of Auditing During Company Mergers
Auditing plays an essential part during company mergers as they provide a trust factor for any potential investor. Auditing is an integral part of the organization and accounting, confirming the company's financial health. The importance of auditing during mergers explained below:
- During the company mergers, the internal audit team must assist with risk assessment, target screening, adhere to Due Diligence and necessary compliance and any guidance on potential risk areas.
- The audit team will require to closely work with the bankers and advisors by attending the meeting and strategizing with the management regarding the program and process of company mergers post the signing of the MOU between the parties.
- An audit is required to address the effectiveness in due diligence based on the checklist items that include assets quality, potentials for any undisclosed liabilities, earnings quality, projected valuations and cash flow concerns.
- In many cases, external audits and internal audits confirm the practical accounting due diligence of the business. External Audit adds a neutral and balanced approach presented to the buyer's shareholders to build trust and acquire the voting confidence to move ahead with the company merger.
How Can We Help?
Jaxa Chartered Accountants, with a network of offices around the UAE, has been guiding and serving clients in aspects related to bookkeeping, accounting and effective audit. Our experts ensure to implement a clean and reliance accounting system in the organization. We firmly provide support to companies looking for mergers by ensuring adherence to due diligence. Please Contact Us if you are looking for any help in all matters related to accounting and bookkeeping. We'd be delighted to assist!