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What can go wrong integrating an acquisition into your business? Here’s what can happen when the finance side of the integration fails:
The Acquisition
Our client had acquired a new subsidiary 9 months ago as part of a vertical integration strategy to feed clients into their existing business. It was a cheap purchase because the subsidiary had been struggling financially for a couple of years, but the parent company had a clear strategy to use it’s existing expertise and capacity to turn it around.
Problem was, cash was declining at an alarming rate but nobody knew why, so they called me in. My brief from the CEO and Board was to find out why cash was tight across the Group after 9 months, even though the subsidiary’s numbers had shown solid improvement … so of course we had questions:
Turnaround plan for the subsidiary vs actual operational performance? Good plan with the right key metrics in place. Operational turnaround is definitely on track.
Cash forecast vs actual? No cash forecast for the subsidiary, the parent, or the group - ok then, show me the cashflow statements? No, we don’t prepare them for the monthly board meetings, it’s not possible.
When a finance team is telling the CEO that they can’t generate cashflow statements from their existing management reports there’s an alert that goes off in the back of a CFOs mind that screams “DIG HERE”.
The Business Acquisition Integration Problems
Let’s check out those management reports then. Oh wait this is a consolidated Profit & Loss statement, but why does that Balance Sheet look like it’s for the parent company only?
Turns out the finance team didn’t know how to generate a Balance Sheet for the subsidiary, so simply didn’t do it … and didn’t tell anyone.
And that’s where the fun began! Turns out the subsidiary had a VERY different cash cycle than the parent: 90% of it’s income was received half-yearly. In the meantime the internal finance department had been simply transferring money from parent to subsidiary to pay expenses without flagging that the cash burn meant the group would run out of cash about 3 months before the next subsidiary income was received.
The Solutions
Here's what we did to recover from the mess caused by the integration problems of this business acquisition:
Implement 3-way reporting to the Board (P&L, Balance Sheet, Cashflow).
3-way forecast for the following 3 years to calculate the cash burn and timeframe for recovery.
Helped the CEO Identify cost-reduction targets that wouldn’t delay the subsidiary turnaround too much.
Negotiate with the bank to increase existing bank facilities to bridge the cash gap.
It was a pretty hairy ride, but it worked. The client received enough funding to finalise the subsidiary turnaround and the group survived, and thrived.
Businesses that are growing by acquisition (like this client) or organically can really benefit from a commercially-oriented CFO. For many businesses the ideal way to access this expertise is via a Fractional CFO..
If your business is growing and you don’t have a CFO - contact Ascern!
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