Consumer products M&A: Finance and accounting keys to a successful transaction

Consumer products companies engaged in mergers and acquisitions activity can support a successful transaction by adhering to certain best practices involving internal controls, data management and subject matter expertise, according to Kevin Brady, RSM assurance partner and consumer products audit policy leader, and Peter Cadigan, RSM assurance partner and consumer products senior analyst.

Brady and Cadigan joined RSM’s “The Audit Statement” to discuss key finance and accounting considerations for a successful transaction in the consumer products industry. Specifically, they covered:

• Introduction to M&A considerations: The importance of good management, solid operations and tight financials in M&A transactions
• Timeliness and reliability of data: The need for timely and reliable data, including quick closing of books and handling of significant transactions
• Internal controls and their importance: The role of internal controls in ensuring clean data and supporting M&A activities
• Supporting lean finance teams: How outside consultants and technology can support lean finance teams during M&A processes
• Technology and data strategy: The importance of a clear, focused data strategy and the effective use of technology in M&A transactions

Below the video is a transcript of their nine-minute conversation, which has been edited for clarity and length.

Peter Cadigan: Let's start by talking M&A. We're hearing the deals that go through have good management teams, solid operations, tight financials and also adjustments that are relatively straightforward. When you're thinking about the audit season and preparing for an audit, how does that play into what management teams should be thinking about?

Kevin Brady: I mean, it's funny—it seems simple, but the easiest indicator to see if a company has good management, is operating effectively, sometimes is just the timeliness of how they can provide information. That includes how quickly they can close their books at the end of a month or a quarter or at year-end. That can go a long way to showing that the finance function is operating effectively.

Additionally, how does a company handle significant unusual transactions, specifically business combinations? Because if a buyer is coming in now to a company, they are probably going to be acquisitive in their first few years trying to build the company up and ramp that up.

So can a company's accounting and finance team handle that? How quickly are they integrating new subsidiaries into their existing systems? How quickly is the opening balance sheet information available and closed out so they can move on to the next transaction in 2025 and going forward?

And then the other thing to consider is not just timeliness, but the reliability of that data. For example, what information management has been providing in their debt covenants and internal reporting to third parties throughout the year.

You want to make sure there are no surprises at year-end and that you don't want significant audit adjustments. So you want to make sure you're providing the cleanest data imaginable to anyone throughout the year that is looking at it.

And in addition to that, just the ability to support those EBITDA adjustments that you have within your internal reporting. They're all entity-specific. Every company has different add-backs that they're doing, and how easily can you provide that support to someone who's looking at your numbers and how quickly can you explain it to them? No one's going to want to sit down with 15 different targets and hear an hour-long explanation of what their EBITDA adjustments are.

So the quicker you can explain those and show to a potential buyer what those adjustments are and that they make sense, the easier the process is going to be for you.

An example I like to use is in the retail space. When we have a new store or multiple new stores during a year, how does management understand the lifecycle of a new store, when it's going to be fully up to speed and to its full potential? And then are there other investments that go into their other capital projects? Are there renovations? Are there other things that need to be considered in those projections that are going forward?

So just make sure that is all clean, good data and it's coming in a timely fashion, and that can get you on the right path.

PC: When I hear “clean, good data,” when I hear about reliability and speed to close, the auditor in me thinks internal controls. And I know that may not be the highest priority for our privately held middle market companies. So as we're thinking about management teams, what would you advise them to think about with regard to controls?

KB: The biggest thing in the control environment is how scalable, how flexible are your controls in terms of can you pull information in an off-peak time that you don't typically do? Can you do a reconciliation at a month-end when it's typically a quarter-end or year-end item? Or are you able to pull information mid-month if someone is calling to ask what your AR (accounts receivable) inventory looks like?

Some of the things management needs to consider there that buyers are going to be looking at are really specific to inventory and revenue—two big things in our consumer products environment.

So how clean is your existence information? How good are your controls around there? Are you doing cycle counts? Do you have significant adjustments during your year-end inventory count where you may need to be counting more frequently to make sure those records are clean?

And then if you're using third-party logistics companies or co-packers, how good is the information you are getting from them? How frequent is it? And is your company able to reconcile—is your team reconciling—that frequently enough to have good records there?

On the revenue side, if you have revenue arrangements with customers that are on a calendar year-end, there is an estimation process that will have to go into play at any quarter-end or month-end that you're going to need to be able to apply to make sure that you have the right accruals on your book so that a potential buyer knows what they may potentially be on the hook for after a transaction that happens in a year.

Just keeping those things in mind and making sure your team is flexible to do their work in an off-peak cycle is really important to a buyer.

PC: Any other ways that internal controls could impact a potential transaction?

KB: Yeah. Any buyer during due diligence is going to get copies of the management letters from your audits over the last two, three years, which include the internal control letters. So your goal is to have as clean internal control letter—or no internal control letter—as possible to provide to them.

But you also want to show if you've had findings in the prior years that you've remediated those findings in the current year and anything identified in the current year you've remediated, as well, by the time the transaction is going in.

So having those conversations now with your auditors who are currently in the process of doing their walkthroughs, doing their risk assessment—and really understanding your control environment, understanding whether they've identified anything at this point that you can remediate prior to either year-end or prior to any transaction occurs—will go a long way to helping a buyer feel more comfortable with the control environment.

PC: Great. You’ve discussed a lot of things that we could be doing right now to help support a potential transaction, but a lot of middle market companies have lean, mean finance teams. What would you advise those types of companies that maybe have a finance team that's already stretched thin as it is?

KB: I would advise that now is not the time to hesitate to spend money to help support those teams. And there's a couple ways you can do that. You can do that with outside consultants, who are able to do outsourced accounting for you, really beef up your control environment, help with some of the complex transactions to free up your team for the information they're going to have to provide during the diligence process.

Because the benefit of having those outside consultants, those outside experts, come in far outweighs what the cost would be, especially when we're thinking in terms of ROI and whether this is going to help us actually close on the transaction in the near future.

The other area is with technology. You should consider what products are out there, but you also really need to consider what your needs are, what your end goals are. A lot of people want to go in and say, "Well, we're using AI now." But buyers aren't just looking at companies that are saying they're using AI. It's: “How are you using AI, and how has it impacted the business positively so far?”

So it's going a step further. So you want to make sure that you have a clear, focused data strategy and that any technology you're bringing in aligns with that strategy. You don't just want to bring it in to say you have it and you're using it. You really need a clear, focused strategy there because that's what people are looking for in the marketplace.