When planning an M&A deal, accounting aspects matter. Each side wants to make a profit, calling for a Win-Win situation. The selling side generally wants a short term capital gain. The purchasing side generally wants to make a longer term profit. The purchasing side doesn’t want to overpay based on overstated profits. And if the reported profit looks low, is this a windfall for the purchaser or is there a catch?

The future is extremely difficult to predict but potential M&A purchasers try anyway to model the expected accounting results. If the potential purchaser is a group publicly traded on a stock exchange, it will want to predict the anticipated affect on future reported earnings as this may affect future share price, bonuses, press coverage, perception of management and a host of additional things.

If the seller is a start-up, there may not yet be any profits, only losses due to R&D. Are better days ahead? Around 80% of tech start-ups generally fail, is the potential seller likely to be one of the remaining 20% or so?

Because the future can be so difficult to predict, the potential purchasing team may spend much time and effort in their due diligence on studying the accounting side, including the following:

• Past profits or losses per financial statements
• How reported profits compare with cash flow?
• Factors affecting profitability
• Emerging technological advantage that may improve future results
• Emerging technological failure that may decrease future results
• The chances of something (else) going wrong (or right)
• Finance facilities and agreements
• Brand valuation – e.g. customers associate the brand with minimum quality standards.
• Goodwill treatment – e.g. if the seller demands a premium above assumed value and the buyer is prepared to pay the premium – it may reflect clients who keep coming back
• The state of the seller’s books – do they seem reliable and up to date?
• Special attention to the quantification and valuation of inventory or other assets. There have been many cases of optimistic counting reversing itself in the next period.
• Are expenses being routinely capitalized as fixed assets? And amortized?
• Which accounting standards are being followed? IFRS? US GAAP, local GAAP?
• Minority interests and joint ventures
• Employee ESOP implications
• Earn-outs for sellers?
• Are assets revalued? How?
• Are any write-offs needed?
• Currency risks.
• Is there high inflation in the country concerned?
• How reliable is the year-end inventory figure?
• Risk mitigation e.g. forex forward deals or hedge deals
• What is the potential purchaser’s policy on all such items? Are adaptations needed?
• Should the selling side be subject to representations and warranties (reps and warranties) in the intended sale agreement that its financial statements are reasonable?
• Etc.

Next Steps:

• Start planning the ingredients of your proposed acquisition or sale based on the above.
• In particular, is good management accounting information available and up to date?
• Is there a CFO on each side?
• Or is one party a start-up where their talents lie elsewhere?
• Many of the surprises may be predictable with proper preparation.
• What is the other side really after? Can you read between the lines?
• Consult legal and professional advisors in each country concerned in specific cases.
• Contact us if you are looking for an M&A candidate to buy or sell.
• Contact us if you have your candidate and want to prepare for an M&A deal.

© Leon Harris 19.5.25, all rights reserved.  Email: [email protected],  Cell: +972-54-6449398,