Deals are still being done in this lean M&A environment ñ but due diligence is
more stringent and buyers want to buy companies that do not bleed red ink. This
is certainly a positive trend (shouldnít M&A be about making smart deals?)
However, when buying a cash-flow positive company, it can quickly become a
negative cash flow company. How? Of course, sloppy integration is the main
culprit.
But an era that is often overlooked in the process is accounts receivable
management.
Smart companies understand the power of A/R management and cash flow. It
explains why a company like Dell can make money in seemingly any environment.
Itís all about running a ìlean and meanî organization.
So, before signing off on a merger agreement, the buyer needs to have a plan for
integration of A/R. After all, in just about every case, the A/R policies and
systems will be different.
What are some strategies? Here are some things to consider:
Due Diligence: How strong is the A/R of the seller? This should be an early
priority in the due diligence process. Is the collection time lengthening in the
A/R? Does the seller have high credit limits or easy terms or discounts? What
part of the A/R is realistically uncollectible? How well does the company keep
track of its receivables, such as through documentation? Do things fall through
the cracks? After asking these questions, you may realize that the company is really a
basket case and should be avoided. Or, it can be ammunition in getting a better
price.
Staffing: If the A/R staff of the seller knows they will be fired, how much
effort will they put into collecting A/R? Obviously, there will be a big
problem. Make certain that the A/R collection process is centralized and handled
by personnel that know they will continue to be on board.
Written Plan: Make sure the integration plan is in writing and deals with key
logistical matters, such as meshing the two computer systems, synching up phone
systems, coordinating customer numbers and dealing with duplicate customers.
Furthermore, each A/R department has its own culture and unwritten rules. So,
the buyer should conduct a variety of interviews to get a sense of how the
sellerís department operates. Customers do not like to see major changes and by
learning the processes of the seller, it can help make for a smoother
transition.
Outsourcing: As the buyer goes through the A/R accounts, there may be some
customers that do not fit requirements. Perhaps a customer is constantly late on
paying its bills, for example. For those accounts that will not be maintained,
it is a good idea to outsource these to an outside agency. This frees up more
resources to handle existing accounts.
Sales Price: Having part of the sales price dependent on the collection of A/R
can be an effective policy. It will provide an incentive to for the seller and
his personnel to be attentive with the collection efforts.
Conclusion
Simply put, the longer it takes to collect A/R, the higher the odds it will
ultimately become uncollectible. Thus, it is imperative to set up an integration
policy to streamline the A/R process as much as possible. If not, an M&A
transaction can quickly deteriorate into a nightmare.
MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the
managing editor of our MergerPlace M & A Advisor™ E-zine.
Tom has been quoted extensively in the press, including the Wall
Street Journal, USA Today, Barron's, and The Los Angeles Times, and has
provided commentary on CNBC, CNN, and Bloomberg TV, as well as
appeared on a variety of top radio stations across the country.
Tom Taulli is an expert in the M&A process. He is the author of the
critically acclaimed The Complete M&A Handbook (Random House) as well
as six other books written for publishers such as Bloomberg and
McGraw-Hill. Tom also teaches M&A at the USC School of Business.