Newly Backed by Private Equity: Accounting and Audit Successes
Insights for accounting and finance teams facing audit season and other challenges after becoming acquired by a private equity fund.
Accounting and finance teams face many constraints in today’s business climate, including staffing shortages or the complexities of a merger or acquisition. These realities are especially impactful within the private equity (PE) landscape, and Riveron’s accounting expert Matt Tepfenhart explores considerations for teams setting out on a PE-backed journey.
Understanding the new PE-backed realities
Often, founder-led companies are acquired by private equity firms for the many clear benefits, although even the most capable accounting leaders that have thrived in supporting the growth and financial planning needs of their organizations face new and heightened post-acquisition challenges.
What are some of the common challenges that arise after an acquisition?
Matt Tepfenhart (MT): “For many of these accounting professionals, it could be the first time they’ve encountered a major acquisition. Then, their teams usually face significant add-ons after that first acquisition, which might be an unfamiliar journey. Even if they have experience with acquisitions and integrations, there’s a lot to do. The workweeks of most professionals are highly demanding. As professionals manage their core accounting and finance responsibilities to keep the business running day-to-day, they rarely have additional availability to incorporate everything that’s necessary from an integration standpoint.”
One financial firm’s audit journey: after being acquired by a private equity fund and tasked with multiple target acquisitions, a company enlisted Riveron to support its constrained team through audit season and prepare technical accounting memos regarding share-based compensation, revenue recognition, and more.Read the success story
For forward-thinking teams and PE management, acquisition lifecycles can be an opportunity to not only comply with audit requirements, but to reimagine and enhance accounting and finance operations. A reimagined approach can help teams prepare for follow-on acquisitions and integrations that usually occur.
Applying accounting and finance expertise on a new stage
When a standalone company moves into a PE-backed status, the deal is usually tied to a high multiple calling for coordinated, effective efforts to realize the investment thesis. As a result, accounting and finance teams face mounting pressure and constraints. They might contend with more rigorous and time-sensitive mandates to report and analyze GAAP and financial metrics in ways that matter to lenders or PE management seeking to guide the business appropriately. Further, if the arrangement involves debt, teams must often align to stringent lender-driven reporting requirements.
In private-equity backed settings, what abilities should accounting and finance professionals bring to the table?
MT: “In many cases, teams already possess general accounting and finance expertise but need guidance applying their knowledge to a scenario they may not have encountered before —or at least not recently or regularly— despite being highly competent accountants, CPAs, and finance professionals. For example, some financially focused companies might have existing people who are capable when it comes to financial planning and analysis, but the nature of their role might change after being acquired by a PE firm. They might need to speed up their FP&A processes, knowing that PE decision-makers need information faster. Plus, the accounting and finance teams have to work in concert, as any delays in compiling accounting data can cause financial forecasting to lag, slowing decisions and failing to support the strategies that can help PE firms realize value.”
A newly acquired telecommunication company’s success: preparing for a smooth audit season and future acquisitions, a chief financial officer and controller worked with Riveron to address several accounting challenges the team had not encountered before their company becoming PE-backed.Read the case study
It is also helpful for teams to remember auditors are not ‘the bad guys’ and that it is possible to take a proactive approach to working with auditors.
How can PE-backed companies be more effective when getting ready for audit season?
MT: “Organizations should be prepared for their audits early on versus waiting for auditors to come and deliver the questions to them. By getting in front of what happened during the year, professionals can set a collaborative relationship with their auditors and tackle major events prior to year-end. And when going through private equity transactions, make sure everything is documented, clear, and ready to be audited. To help companies be truly ready for their audits, our process includes looking ahead to anticipate what the auditor support and work papers need to include.”
Reshaping the accounting-finance dynamic after the deal
The private equity landscape continues to advance in complexity as deal sizes have been larger with increased multiples, and PE funds are bringing not only equity but also debt. When debt is involved, it necessitates stricter reporting requirements for lenders. Plus, PE-backed accounting teams usually face stringent monthly reporting that is called for by PE leadership.
How do PE firms cause expectations to evolve for accounting and finance teams?
MT: “Prior to being acquired by a PE firm, an accounting team might not have been looking at all the GAAP metrics (and other adjusted or non-GAAP metrics) that private equity managers and lenders typically expect to see. Teams also face new constraints such as deadlines imposed by banks or the PE management. Accounting teams are not the only ones affected. After becoming a PE portfolio company, there’s usually a big FP&A component that has to be completed in a timely way so that leaders can analyze the business appropriately.”
Often, private equity-backed teams will benefit from rethinking their financial planning and analysis (FP&A) approaches, especially by prioritizing scenario planning and considering how to align the various stakeholders involved with these effortsRead a related interview
During the PE journey, teams can be impacted in myriad ways, whether a merger causes strategic shake-ups in C-suite roles or a need for existing finance and accounting team members to apply knowledge in different ways. New leadership reporting structures and management styles can cause a realignment of priorities and expected outcomes of individuals.
Reimagining efficiencies amid accounting team shortages
Staffing shortages and unexpected attrition are prevalent issues for companies across many industries and growth stages, and the story is no different for finance and accounting teams. In the private equity lifecycle, staffing constraints may spur a need for companies to enlist temporary accounting and finance leadership (such as an interim CFO or controller) to get through the necessary changes in a compliant manner while also setting the future vision and groundwork for successful operations.
How should organizations contend with leaner teams during change events?
MT: “As part of a broader trend, we’re continuing to see short-staffed companies, which can be an issue with the heavy lift required during these initial M&A transactions. Our advisory teams are often engaged to set up a company’s finance and accounting operations after a transaction with an eye to the future. During that process, the company’s team learns and becomes able to handle add-on transactions on their own, with little ongoing oversight from advisors.”
Accounting and audit guidance in the interim: by serving as an interim CFO, Riveron worked alongside the leaders of an education technology company to complete five year-end audits for different entities, evolve and grow the accounting function, and create an approach for optimizing new portfolio companies.Read the company's story
Considering the best timing for implementing technology
Whether integrating and streamlining disparate systems or choosing to implement a new enterprise resource planning (ERP) system, timing decisions related to technology can have a significant impact on private equity firms and their portfolio companies.
When is the best time for PE-backed teams to upgrade or roll out new technologies?
MT: “CFOs know it’s a big investment to change an ERP or accounting system infrastructure. The best approach depends on where you are in your business lifecycle, but often we suggest doing an implementation like this day one—getting through that foundational initiative as quickly as possible—so that you can set up the system in the beginning and be able to deal with additional acquisitions down the road. It’s always challenging, but building the right, scalable infrastructure from the beginning gives the company a base to roll into as it continues to grow and improve. Technology can enable better accounting and more streamlined audits, especially when organizations are strapped for staff resources or have a data-centric nature of their work and customer base.”
A strategic ERP implementation: one private equity portfolio company navigated multiple acquisitions and audits while working to accelerate monthly close. The company implemented NetSuite as its new ERP system, which improved financial reporting and automated processes, enabling the controller to provide more strategic support for the business.Read the success story
Audits place high demands on time and company resources. Riveron’s extensive experience and straightforward approach helps companies to elevate possibilities and ensure a streamlined audit process.