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Centri Case Study: Achieving a Smooth Add-on Acquisition with Centri

Challenge

A private equity portfolio company realized that they lacked the necessary technical expertise on financial accounting, tax, and IT/cybersecurity considerations in due diligence procedures during the acquisition of an add-on company. Moreover, the company’s finance and accounting department was stretched thin, as they focused on both closing the transaction and forward-looking value creation for the acquired company.

Action

The company engaged Centri concurrently for multiple projects to assist with the transaction. Centri was first engaged to perform buy-side financial and tax due diligence to help the Company assess the benefits and risks of the target prior to the closing. The company also worked with Centri on how to structure the acquisition of the target from a tax perspective to optimize future tax benefits. As part of these procedures, Centri identified certain earnout clauses within the purchase agreement tied to the future performance of the acquiree that might be challenging to quantify. The earnout language was vague about if the earnout payments would be treated as compensation or additional purchase price which has impacts on both financial reporting and tax.

In addition, Centri performed an information technology (IT) due diligence review and a cybersecurity risk assessment of the acquiree, to provide an analysis of the acquiree’s IT infrastructure, and cybersecurity systems. This review included assessing the current level of optimization of IT systems to perform operational and accounting processes, as well as identifying potential gaps and red flags in the cybersecurity environment.

Furthermore, Centri was also engaged to perform the opening balance sheet work, including the valuation of all intangible assets acquired and fair value of contingent consideration paid, preparing all acquisition journal entries, and documenting its analysis of the accounting considerations in a position paper for its auditors in connection with the acquisition.

Finally, Centri provided accounting and audit services to assist management in integrating the new reconciliations, calculations, and procedures into its monthly and quarterly financial statement close processes. This involved performing a cash-to-accrual reconciliation to convert the acquiree’s financial information to U.S. GAAP and performing a search for unrecorded liabilities which identified several unrecorded expense and accrual items that were not captured in the initial draft of the closing trial balance provided by the acquiree.

Resolution

Centri assembled a team from multiple service lines that adopted a collaborative approach to the project, not only by providing management with deliverables, but also by working side by side with the acquiree’s team.

In identifying the vague language in the purchase agreement tied to earnout clauses, the acquirer renegotiated the language about financial measurement calculations, payment timing, and the scope of the earnout clauses. Without doing so, the acquirer may have been at risk for potential disputes and disagreements leading to litigation months after closing the transaction. Both parties also agreed that earnouts were intended to be characterized as additional purchase prices for both financial reporting and tax purposes; therefore, the language in the purchase agreement was adjusted to reflect the proper characterization.

Centri’s tax team was able to structure the acquisition of the target’s stock as an asset purchase for US federal and state income tax purposes due to its tax profile. This resulted in a “step-up” in the tax basis of the target’s assets, providing both immediate and future tax amortization deductions for the company.

Centri trained the internal accounting team on implementing acquiree’s balance sheet and other accounting items into its own processes, provided perspective on how Centri approached its analysis, and delivered a foundation so management would be able to maintain the accounting responsibilities going forward. Centri ensured the Company’s recording of liabilities was complete and accurate by performing a search for unrecorded liabilities and coached the client’s accounting team to incorporate this step into their review procedures at each period end.

Further, Centri provided a roadmap to remediate identified cybersecurity vulnerabilities and highlighted opportunities to integrate more automation into current manual processes. Additionally, Centri developed a formal IT asset inventory system to identify, track, and monitor company-utilized systems and tools. A segregation of duties and user access review was also performed to reduce risks and redundancies in the core ERP system.

In addition, multiple automation opportunities were identified for implementation to automate key processes such as account reconciliations, financial statement period end procedures, and maintenance of intangible assets, increasing efficiencies and reducing manual activities on a go forward basis.

Results

By utilizing Centri for multiple aspects of the acquisition, the Company significantly reduced the level of effort in providing all required materials to Centri and allowed management to focus on the necessary early phases of value creation and growth activities prior to the deal closing. Centri’s cross-service-team approach permitted the valuation team to provide purchase price allocation data to the technical accounting and tax team ahead of schedule, as well as the technical accounting and tax team to do the same in providing journal entries and areas of focus to the accounting support and tax team in implementing the reconciliations and financial statement close procedures.

The client received an audit-ready opening balance sheet, a technical accounting position paper to provide to the auditors, detailed supporting reconciliations to support its financial statements, and a structure deck on the steps needed to acquire the target in the most tax-efficient manner. One month post-acquisition, the acquirer closed the books of its newly acquired subsidiary within 7 days of period end, in accordance with U.S. GAAP accounting standards and the acquirer’s protocols.

Centri consistently succeeds in quickly assessing the needs of its clients, assembling a team of technical experts in each service line, and providing high quality, timely deliverables so clients can focus their efforts on growing their business and meeting their financial and operational goals.

Curtis Farrow

Partner | Private Equity & Venture Capital Practice Leader | CPA, ASA

Curtis is a Partner at Centri Business Consulting and the leader of the firm’s Private Equity & Venture Capital Practice. He has more than 11 years of experience and has supported many clients in achieving their growth initiatives in connection with M&A, capital raising, reorganizations, and carve-outs, as well as successful liquidity events for stakeholders via IPOs, de-SPACs, reverse mergers, and other M&A transactions. Curtis joined Centri in November 2019, where he combines his strong expertise in business and intangible valuation with his knowledge of accounting to identify, address, and resolve business issues for investors and entrepreneurs.. View Curtis Farrow's Full Bio

Anthony Fumo

Director | CPA

Anthony is a Director at Centri Business Consulting. He has more than 9 years of experience in public accounting, private accounting, and consulting services. View Anthony Fumo's Full Bio