After a down 2023, the M&A market rebound has been real this year.
M&A activity through September increased 19% YoY, both in deal value and volume, according to a recent EY report. EY projects M&As will finish 2024 ahead of last year in both corporate volume and private equity transactions.
Some organizations might be feeling rusty after a couple of slow years, or may be new to M&As. To help CFOs jump back into the M&A game, CFO Brew asked experts what finance teams should expect leading up to and after a transaction takes place.
Deals rising. Kati Penney, corporate transactions leader at CrossCountry Consulting, said she expects “M&A activity to increase and a lot more candidates to go out to market,” in part because private equity firms have been holding onto companies for longer than normal. Hold periods have been longer because of economic conditions generally and high interest rates specifically, she added.
“But at some point there needs to be a realization on those investments, so hence they will go to market,” Penney told CFO Brew. “As a result of that, I do expect…an increase in M&A activity.”
For its part, construction contractor Limbach Holdings is acquiring smaller companies as tuck-ins to grow its market share and expand its geographic footprint, according to its CFO, Jayme Brooks. Limbach’s recent acquisition of Kent Island Mechanical marked its fourth deal so far, she said.
The company’s acquisition strategy fits into its broader strategic shift from working primarily on large projects under a general contractor to working directly with building owners on maintenance-type contracts, Brooks told us. Limbach does HVAC, electrical, and plumbing work for “mission critical” facilities like hospitals, data centers, and research laboratories.
House in order. With Limbach’s M&A strategy, “because we’re looking to expand our footprint or be in a new geography, we want to integrate those companies completely into our model,” Brooks said.
“So, cultural fit and an ability to take on our business model of how we go to market is a big piece of that acquisition process,” she added.
How a finance team prepares for an acquisition depends on the acquisition type itself, CrossCountry’s Penney noted. But broadly speaking, she said there are two areas to keep in mind: the financial reporting implications and the integration of the target company.
On the reporting side, “there’s a rule book,” Penney said. “There’s technical accounting guidance that will dictate how…that acquisition needs to be reported in the company’s financial statements.” Whether the acquiring company is private or public “influences the level of external reporting and disclosures.”
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Time to integrate. But the larger piece, one without the nifty technical guide, is the integration of the companies. Acquisition-heavy companies may have a general playbook, but “every deal is different” and will come with its own nuances, Penney said. But one key priority for finance teams is they need to maintain “internal and external financial reporting requirements, their billing, their purchasing, their payroll” throughout the integration process.
“For accounting and finance teams, the short list, although not easy, is making sure for the target companies that they communicate the expected deliverables and deadlines,” she said.
Limbach faces some challenges as a public company when acquiring a smaller, privately held one. The acquired companies are entering a whole new “public company world of SOX controls,” Brooks said. Rather than train up the accounting team from the acquired company, “we’ve found that it’s much easier to bring all [the] accounting functions internal,” she said.
Limbach’s finance department switched to a shared service model to be more efficient, “so that when we bring in an acquisition, we can pull in a lot of those accounting functions directly into that shared service department,” Brooks noted.
The construction company tries to bring new acquisitions into its ERP system “as soon as possible,” Brooks said. Its finance department also typically needs to “create the opening balance sheet” for the acquired companies, which often “did more of maybe a review or a compilation for their financial statements, [and] in some cases, they’re just doing it internal.”
Penney also advised that acquirers think about integration early on. It’s during due diligence when “synergies are identified, the overall investment deal thesis,” she said. “As you’re doing diligence, look at the people, process, technology to ultimately deliver on that investment thesis.”
Acquirers will commonly put together an integration team, which includes departments including finance, HR, IT, legal, and others, according to Penney.
Limbach has an EVP of M&A, who oversees the deals and brings in departments when needed, Brooks said. Like other departments, the finance team has dedicated staffers who can switch up their daily duties to work on acquisitions when they arise. Front-end due diligence work for the finance team includes examining the target company’s business model, double checking the accuracy of the financials, and valuating the business.