7 Red Flags that can Kill an M&A Deal

If your company is looking to acquire or to be acquired, one of the most important areas to evaluate is the ability to manage money. Because of this, the accounts receivable department will be at front and centre of evaluations.

A competent team should be able to demonstrate that they can bring in clients’ money within the defined payment schedule. After all, if working capital is deficient, there will be added costs to borrow to pay to keep the company moving forward. To be certain, the acquiring firm will want to confirm whether best practices are in place, and will try to establish and update those credit practices found wanting.

Collecting accounts receivables is one portion of working capital but proactive cash flow management is vital to avoid a short-term liquidity crisis.

Smart firms get ahead by demonstrating that the business owner was not cutting special deals to his buddies or writing things off ad hoc, but rather that there were formalized systems to ensure the money is collected consistently.

Once the deal is struck, the first 90 days are the most critical. In the credit department, the acquiring firm will be vigilant for a gap between what was said on paper and the company’s actual ability to collect money within the 30 days or 60 days. The key question on the buyer’s mind is: will there be a cash flow hole?

The following are seven red flags to look out for, and although one red flag does not necessarily kill a deal’s success, several can indicate problems ahead:

1. Payment history changes. If receivables were 45 days, and are extended to 60 days to collect payment, an increase in working capital will be required.

2. Projected payments. As the M&A deal is finalized, there will be projections made about the expected time frame for collecting money from clients. DSO (Days Sales Outstanding) is the key indicator of how fast the accounts receivable is being converted to cash. If the DSO begins to slip from 30 days to 60 days, that gap will have serious consequences on the amount of cash the company has to pay for operations. If timing for actual collections begins to slip from 30 days to 60 days, that gap will have serious consequences on the amount of cash the company has to pay for operations.

3. Initial payments. Credits coming through in the early days after the acquisition will be analyzed with a fine-tooth comb. The acquiring company will want to see if the credit department is passing journal entries to clean them up. The credit history in the first 90 days after the acquisition date can reveal a great deal.

4. Employee turnover. Talent management is reviewed and employees leaving the department might indicate management issues.

5. Vacation schedules. When people do not take vacation, it could indicate fraud. If credit write-offs do not require a second approval, many problems can be hidden.

6. Performance management. How can the acquiring company give incentives to address the issue of collections? The credit department’s number one goal will be to reduce the number of days of payment. One way is to show the credit department the impact of late payments on the overall company. For example, if there’s $10-million of receivables, reducing the time to bring in that cash from 60 to 50 days means the company needs less working capital. Leaders in the credit department could even get their employees to share in part of the benefits by collecting at the 50-days target.

7. Team incentives. The biggest challenge for the credit department is to stay motivated. The best performing teams know how to reward the right behaviour and to celebrate when the big goal is met. Hopefully, with spring around the corner, an employee BBQ goes a long way towards creating a positive credit collection culture.

GBSH Consult is a company which focuses on succession advice for large, medium-sized enterprises, family businesses and closely held private companies. GBSH develops customized strategies, particularly in relation to sale of companies, M&A, financing and corporate strategy matters. Follow us on twitter @gbshconsult. Sign up for our weekly newsletter.