The merger and acquisition (M&A) market in Canada remains active, despite the coronavirus pandemic.
In EY’s Canadian Global Capital Confidence Barometer published in June this year, 62% of respondents still intended to pursue deals in the next 12 months, despite the survey taking place during the spring, as COVID-19 took a hold in Canada.
If M&A is on your radar, how can you navigate the potential pitfalls? What steps should you take to ensure you’re prepared? Whether you are considering M&A as an acquirer, or as a business that’s receptive to being bought, the required steps and features for in a potential acquisition, are underpinned by similar considerations.
And whether you are contemplating a merger or acquisition from a board, compliance or governance perspective, the challenges you need to consider will be the same. However, you may approach the challenges from different perspectives and with differing priorities.
Entity management is one of those challenges. If you’re looking to merge with or buy another organization, you will want to know that they take a meticulous approach to corporate governance and regulatory compliance across all their legal entities.
Not just that, but best practice entity management will facilitate the M&A process itself, making it easier for you to obtain the evidence you need for due diligence. In this article, we look in more detail at how you can use best practice entity management to ensure success in your M&As.
How Can Entity Management Support Your M&A Activity?
Robust entity management has numerous benefits to your organization – and never more so than when you’re considering a merger or acquisition.
What do we mean by entity management? Broadly speaking, it’s the processes by which you manage the activity of your subsidiary businesses, particularly when it comes to compliance and governance. Robust entity management increases the likelihood of your business being well-managed, with consistent processes for meeting regulatory requirements across all your legal entities and jurisdictions.
Good entity management enables a business to access the data it needs to measure and manage regulatory compliance. It delivers central oversight of governance practices, and through doing so, provides assurance that corporate governance is being tackled appropriately in all geographies.
Here are the three core aspects of M&A readiness and the M&A process where entity management really comes into its own:
1) The Data Trail
When you’re planning a merger or acquisition, you’re faced with the need to get up to speed with an unknown entity, in a short timeframe. Getting hold of the data and documentation you need to do this is a vital first step, while a lack of reliable data can hinder your plans.
‘Lack of trust in data’ and ‘reporting deficiencies’ are identified as two of the four fundamental challenges of good entity governance. When it comes to potential M&A, these challenges are amplified. When conducting the required due diligence (more of which below) potential buyers need the assurance created by a robust audit trail.
Historic data can be required at short notice, and pulling this together manually can be inefficient and labour-intensive, with inconsistent results. Avoiding this can be the impetus behind adopting entity management software, a route increasing numbers of businesses are taking to improve the quality of their data. Read more about how entity management software can help to make M&A faster and simpler.
2) Due Diligence
Comprehensive due diligence underpins any M&A deal. The data trail covered above is the foundation of this due diligence work; any due diligence process depends on the quality of the data available, and the ease of gathering that information.
Several factors will impact the relative importance of different data sets. For instance, a recent article at ICLG, sharing tips on getting M&A deals done in the COVID-19 era in Canada, notes ‘certain aspects of a business are more important to examine in light of COVID-19. While suppliers, customers and employee matters have always been key areas of diligence, these may require deeper examination in the COVID-19 era…Similarly, some buyers may wish to examine more closely a target’s workplace practices and policies to ensure they do not violate public health requirements.’
The ICLG article also states that ‘COVID-19 has impacted deal due diligence in many ways’ and that ‘parties should anticipate that due diligence will take longer than what was “normal” prior to the Spring of 2020.’
The current environment may make it more difficult to conduct certain aspects of due diligence – in-person checks, for example. This makes the need for robust data that can be easily and remotely accessed greater than ever.
3) Facilitating the Audit Role
The internal audit team plays a key role in the M&A process. EY’s paper exploring Internal Audit’s role during the strategic transactions life cycle cites M&A and divestitures as ‘some of the most risk-heavy initiatives that any organization can undertake.’ Consequently, internal audit procedures are vital in ensuring that transactions are undertaken based on transparent, accurate and comprehensive information.
Whether it’s providing insight into key risks, reinforcing ownership of governance and compliance, identifying potential gaps in integration plans, ensuring accurate pricing or highlighting implications of the transaction for other areas of the business – the role of the internal auditor sits at the heart of M&A activity.
COVID-19 has intensified this need by adding a layer of complexity to Canadian M&A – as ICLG notes, ‘In response to the COVID-19 pandemic, the Canadian government has significantly increased its scrutiny of foreign investments using its national security review powers.’
The additional work and time needed to complete potential deals make it more important than ever that organizations are fully prepared to transact when the opportunity arises – with all information available and verified at the point it’s needed.
Using Entity Management Software To Smooth the M&A Process
It’s clear from the brief summary we’ve shared here that impeccable entity management is essential for successful strategic transactions – and never more so than now. Like businesses worldwide, Canadian organizations are working in unprecedented conditions. And with governmental action to oversee the impact of international transactions overlaying the usual raft of regulatory requirements around M&A, transactions may take longer and require more pre-work before closing.
Canadian businesses looking to merge, acquire or divest, though, shouldn’t write off the possibility of a deal at the current time. Entity management software, as well as supporting organic growth, can be the difference you need when it comes to M&A, particularly in challenging circumstances. But not all entity management software is created equal, and with a confusing array of potential options, you need to make sure you make the right choice for your organization.
Diligent Entities is market-leading entity management software that enables organizations to centralize and manage data management for their corporate subsidiaries, simplifying their entity governance, improving compliance and mitigating risk – and as a result, facilitating M&A. You can find out more on our website.