Mergers & Acquisitions Internal controls – information used in controls

As you are going through your M&A process, you may be wondering, “What are the top five mistakes you can make along the way that your external auditors can find related to SOX?”

I suggest you watch the video. It’s easier to understand if you are a visual/audio leaner. The content below is the same as the video. It’s for those who learn by reading.

In an M&A there are typically 16 types of documents, or types of information, that will be used. Saving the documentation as you go through each of the steps in the process can be very helpful in the future when external auditors ask questions. Keeping records and capturing the essence of a live event near the time it occurs is important, e.g., a meeting or phone call.

Items 1, 2, and 3 are linked together and important because throughout a negotiation there may be multiple iterations of the terms and conditions that are presented and your purchase price can change up and down.
Documentation of the board’s approval needs to be accompanied by the documents the board used to make its decision.

4) Merger agreement

Once the board has approved the transaction someone will draft the document to be signed by the target and the acquirer (CEO, CFO, or General Counsel).
This is the critical document for the transaction. Saving this provides evidence of the date and the signature of those who signed off on it.

5) Opening balance sheet

Designate what you are buying from the target.
The amount for the opening balance sheet can change, e.g. if you move the date of your transaction from the 1st of the month to the 5th of the month.
Save the final version of this document.

6) Internal Forecast

Often a three-year or five-year model. You probably did some internal analysis of buying a company, of a certain shape, size, or sector, how it would help your business grow by a certain percent.
Document what the internal assumptions were before going into the transaction.

7) Deal model

This is your business assumption plus the asset/strengths of the target company.
A deal model can include things such as "we pay you a certain percentage of retainment," or "we are assuming that revenue will increase or decrease a certain percent," or "we are going to divest of certain aspects."
You will document all of the factors that went into building that deal model. This is important because later on you will give this to your valuation firm and they will use this to put a price on what you are buying.

8) Agendas for meetings and calls

Agendas can help document events, especially for meetings where minutes are not taken.

9) Emails and/or Slack messages

Saving these is important because they can document the back-and-forth for the decision making process.

10) Due diligence report

Prepared by 3rd party consultants.
Designates what you are buying from the target.
The amount for the opening balance sheet can change, e.g. if you move the date of your transaction from the 1st of the month to the 5th of the month.
Save the final version of this document.

11) Valuation Report

Prepared by 3rd party valuation group
This will detail the types of assets you purchased, e.g., whether they are physical assets, intellectual property, or customer lists.

12) Tax purchase price allocation workbook

Prepared by 3rd party consultants
This will address the tax write-off, advantages, liabilities or positions you are taking as part of buying this company.

13) Purchase price allocation workbook

Prepared by 3rd party consultants.

14) Accounting memo

Prepared by 3rd party consultants.

15) Bank statements

There will be activity wiring money in, out, to escrow, etc.