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11 August 2021
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5 minutes

Seven M&A challenges and how to meet them

When spinning off and selling a business unit, clear-cut challenges can threaten the successful operation of the carve-out.

Here are seven areas of complexity that CFOs and M&A teams need to proactively address:

1. Transferring employees

The complexity of the employee transfer process depends on the nature of the deal and the markets involved.

In a carve-out situation, the usual challenge centres on people moving from a larger organisation into a smaller one. The impact on employees’ mindsets can be massive.

“The last thing you want to do is miss a payroll or fail to adequately explain a change in benefits,” said Ben Fielding, Managing Director Ireland and the United Kingdom at TMF Group. “They are going from a very stable environment to one that has more uncertainty in it. Employees naturally may be worried and have a heightened sense of attention to detail. If even a small thing goes wrong, they are going to notice it and you’re at a high risk of people leaving.”

That’s where back-office functions take on a strategic role. Processing payroll and expense reports on time sends an important signal that the carve-out is well managed. If the carve-out is transitioning from the seller’s systems to their own, interim technology solutions and processes may be needed.

Another important factor to anticipate is how to comply with specific local HR and benefits requirements, country-by-country. TMF Group knows the rules in more than 80 countries and can reassure the head of HR and the CFO that all requirements will be taken care of by local experts. Management can then focus on more strategic issues and work with their teams on the transition rather than the logistics of transferring employees from one entity to another.

2. Back-office infrastructure

The structure of the deal may influence the type of set-up that needs to be put into place, the entities that need to be incorporated, and the tax registrations and regulatory approvals that need to be obtained.

Many companies put their focus on the tax consequences while neglecting the set-up and management aspects. Some will take the first step to create the deal structure but fail to follow through to maintain compliance.

Deal structures determine the cost levels and time it takes to become operational. Incorporating a new entity and registering it for tax compliance takes time, as does obtaining regulatory approvals in each operating country across the region.

3. Operational due diligence

Companies entering into M&A deals need to have a clear vision of how internal processes are going to work after the transaction takes place. It’s important to understand the operations of the target company to see how they fit into the structure of the buyer’s enterprise.

An operational due diligence review should be undertaken by specialists at a professional services firm that understands the industry and the markets in which you operate.

4. Multiple integration partners

Buyers need to consider whether they’re acquiring the whole entity or just part of the assets. If acquiring a full business with physical entities and employees, the buyer will likely take over employee contracts and any pre-existing contracts with suppliers. If acquiring a division, then the buyer will take on part of the assets rather than all the non-essentials.

Regardless of the deal, the buyer may either inherit a company that had a single back-office function servicing all of its divisions or they will need to set up teams for accounting, payroll and compliance.

Where the purchase covers multiple countries, the buyer might inherit multiple vendors, including separate providers for payroll, accounting and regulatory compliance, across several jurisdictions. If the buyer lacks the necessary resources to manage all these suppliers, a single provider covering all countries of operation can simplify the process considerably.

“The advantages of working with a single vendor are substantial. First, it's going to be less expensive, especially when compared with working with law firms for entity set-up and operational readiness,” said Ben Fielding, Managing Director Ireland and the United Kingdom at TMF Group. “It’s better to outsource to one partner because the interdependencies between the activities are immense. It's just not realistic to try to put a team together on the buyer side to organise all that. It’s also easier when the lead executive – such as the head of transformation -- manages this process without also having to coordinate vendors and tasks.”

5. International complexity

Understanding how the business is operating in each country is critical: are they compliant? Have they completed the necessary tax filings over the entirety of its operations? What about other reporting and regulatory requirements in each country?

Buyers can comfortably outsource operations to TMF Group for a flexible approach, local teams and global knowledge.

“You benefit from having people who are experts on a global level and locally as well. We understand the local nuances and issues and how to deal with them,” said Fielding. “Consolidating it all is also an important part of the playbook. We make it easy to execute at a local level while bringing it all together and presenting a plan to management for multiple countries.”

TMF Group has local offices in over 85 jurisdictions, with dedicated teams whose fingers are on the pulse of changing regulations and requirements, such as the frequency of payroll and components of employee benefits.

6. What HAVEN’T you thought of?

“Two-thirds of the conversation we have at TMF Group with buyers involve informing them about things that they haven't considered. That's a valuable dimension of our service,” said Museyri. “Handling dozens of carve-outs each year, we can see around the corners to help clients understand what is required and identify potential pitfalls.”

TMF Group helps clients through the critical and complex shorter-term challenges of the carve-out. These services help the buyer achieve their business goals in the interim period. Over time, management can work out what capabilities the buyer should build and which to continue to outsource. For example, perhaps accounting can be brought in-house, whereas support on winding down or opening entities and other company secretarial functions can be outsourced to experts.

7. Do you have the resources?

Working with a partner that provides administrative support services can help relieve some of the pressures faced by your deal and integration teams. Once the deal closes, you’ll need to move quickly.

It’s time to give a seat at the table to the only company that can conquer cross-border compliance complexity from our base of 125 offices covering more than 85 jurisdictions. Some 9,100 experts are dedicated to unlocking access to some of the world’s most attractive markets – no matter how complex – swiftly, safely and efficiently.

You don’t need to handle these challenges on your own. Talk to TMF Group today for help with your carve-out.

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