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.
Company Mergers
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.
