Companies undertaking M&A transactions come up against three key financial compliance challenges.
In TMF Group's work with companies undertaking merger or acquisition transactions across the globe, we see the same three financial compliance mistakes time and time again.
1. Not putting the right deal structure in place
The structure of your M&A deal is an important one to get right, because it influences a myriad of factors from the type of setup you need to put in place, to the type of entities you need to incorporate and the type of tax registrations and regulatory approvals that you need to obtain.
Deal structure also determines cost levels and the time it takes for you to become operational. If you need to incorporate a new entity, this takes time. If you need to register a new entity for tax, this takes time, as does obtaining regulatory approvals in a country. So the deal structure cannot be underestimated in terms of both the cost and time needed to conclude the merger or acquisition.
We often see companies undertaking M&A transactions wrongly focusing on the tax consequences and paying little regard to the setup and management aspects. Likewise, when looking at a deal structure, we see that many companies take the first step in creating the structure, but then don't worry enough about what they need to do to keep it compliant until the M&A transaction is completed.
It's common to see a period where companies completely overlook the compliance side because they wrongly believe that, for example, a dormant company doesn't have any compliance requirements. This is not correct. In many countries, even a dormant company requires the filing of nil tax returns. Not complying with this requirement might have a financial consequence in the form of fines and penalties. So the first challenge is the deal structure and getting it right before the actual transaction takes place.
2. Having insufficient operational due diligence
We often see companies enter into M&A transactions without a clear vision of how processes are going to work after the merger or acquisition takes place. They haven't given thought to how processes are going to be managed or what kind of technology is going to be used. Gaps are often identified after the transaction is completed.
A recent client of ours acquired a business with operations in 20+ countries. They realised after the acquisition, that the management of expense claims was a process not covered by the seller - a process for which they didn't have a solution. On the first day of official ownership - after all employees had been transferred to the new entity – the client had to find an immediate, fast solution in order to manage the issue.
Not looking in sufficient detail into the processes while nutting out an M&A deal will likely cost you money later, because a fast solution typically comes with a premium price tag.
3. Underestimating the time and resources required for compliance
Usually companies enter into transition services agreements (TSAs) with sellers in order to ensure support from an operational and corporate reporting perspective. From a finance and accounting perspective these TSAs typically cover invoicing, US GAAP, IFRS reporting, consolidation, accounts receivable and accounts payable management. But what they do not cover is compliance with local regulations, preparation of financial statements, preparation of local tax returns and so on. Buyers need to find their own solutions, because non-compliance with local regulation comes at a cost: fines, penalties, reputational and sometimes even operational risks.
When entering into an M&A, our recommendation is to examine the local compliance processes and requirements in detail as opposed to focusing purely on operational processes. Understand very clearly who is going to be charge of compliance. What tools will be used? If there are any gaps, how will they be covered?
Talk to us
TMF Group's accounting and tax and consultancy solutions experts are located in more than 80 countries around the world. We can assist buyers of all sizes with M&A transactions; not only on the compliance side, but also through identifying any process gaps and putting the right mapping and responsibility allocations in place.
When should you engage with a service provider like TMF Group to help support your M&A deal? Six months prior to closing is recommended. Contact us today.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
