Accounting for Startup M&A Transactions: Challenges & Tips for Success 

M&A Merger and acquisition business finance concept. Businessman pressing button.

Especially for startups and emerging growth organizations, the M&A process can be wrought with complexity, requiring a hefty focus on planning, resource allocation, and identifying ways to maximize efficiency well before the deal goes through. 

Where accounting for M&A transactions is concerned, even seemingly straightforward deals turn complex as new accounting standards and regulations must be adhered to and processes and systems are combined with another entity. 

As experts in helping startups and emerging growth companies build a strong and reliable accounting function, we’ve outlined some of the main challenges companies face when accounting for M&A transactions alongside some quick yet impactful tips to establish M&A accounting success. 

Important things to know about M&A accounting:

Why is accounting for M&A transactions important? 

M&A accounting plays a central role in ensuring the financial impact of the transaction is accurately represented, guiding the success of M&A due diligence, negotiation, and the integration of two separate entities. 

Establishing M&A accounting success requires thorough planning, a comprehensive understanding of accounting standards and regulations, and the ability to eliminate redundancies across processes without interrupting operations. 

M&A accounting activities: 

  • Purchase Price Allocation (PPA). 
  • Fair value assessments. 
  • Accounting for transaction costs such as legal or advisory fees. 
  • Tax implications, including deferred assets and liabilities. 
  • Preparing financial statements and disclosures that reflect the acquisition. 
  • Integrating costs between two entities. 
  • Goodwill impairment testing. 

What are the main challenges startups and emerging growth companies face with M&A accounting? 

The M&A process is challenging for any type of company – but smaller companies in particular may have more difficulty navigating the process due to a lack of expertise, internal resources, and unfamiliarity with stringent and ever-evolving laws, standards, and regulations. 

M&A accounting challenges for startups and emerging growth companies: 

  • Navigating complex valuation processes and ensuring a maximization in value. 
  • Misallocating purchase prices during fair value assessments. 
  • Merging people, processes, and systems after a deal goes through. 
  • Ensuring compliance with new accounting standards and regulations. 
  • Having a limited financial history that impacts the ability to conduct thorough due diligence. 
  • Evaluating the success of the deal post-integration. 
  • Coordinating efforts among different departments and companies. 

What are the main steps startups should take to establish M&A accounting success? 

  1. Develop a project roadmap as early as possible, factoring in accounting and financial considerations to drive post-merger integration efficiency. 
  2. Conduct thorough due diligence on the acquiring organization’s financial statements and contracts to help identify potential issues and ensure accurate financial representations. 
  3. Form a dedicated integration team using either internal or external support. 
  4. Gain an understanding of the accounting standards that must be adhered to, being sure to stay up to date as regulations change and evolve. 
  5. Develop a clear plan for Purchase Price Accounting and determine the value for tangible and intangible assets, allocate liabilities, and calculate goodwill. 
  6. Ensure consistent cross-functional collaboration and communication to keep key players aligned. 
  7. Document the M&A process, including records of due diligence, valuation, and decisions made during the integration. 
  8. Migrate data from the acquired company to the acquiring company. 
  9. Integrate accounting employees from both companies by aligning payroll, benefits, and more. 
  10. Conduct post-merger reviews to gain an understanding of the effectiveness of the integration, identify areas of corrective action to guide the success of future deals. 

    Final Thoughts on Accounting for Startup M&A Transactions 

    Startups and emerging growth companies who have already taken the time to develop a solid accounting function will see more success with M&A due diligence, negotiation, and integration – so before embarking on an M&A, it can be beneficial to take a step backwards and focus on building solid accounting fundamentals to help your company become more attractive to potential buyers and streamline the integration process down the line. 

    Whether you’re in the midst of a new deal or are still considering whether or not an M&A is the right transformative initiative for your unique company needs, our experienced team of M&A consultants at Kranz are here to help with: 

    • Corporate strategy and valuation analytics. 
    • M&A due diligence. 
    • Spin-outs, carve-outs, and joint ventures. 
    • Post-merger integration. 
    • Financial process documentation and reporting. 
    • Accounting standard adherence.