How to Leverage Contract and Recovery Audits Post-Mergers & Acquisitions
May 2, 2019
The current climate for mergers and acquisitions (M&A) is as busy and lucrative as it’s ever been. There were more than $1 trillion in such deals made in 2018, and even though the sheer number of deals has lagged so far in 2019, the total value of existing M&A deals has continued to rise. For the foreseeable future, M&A will continue to shake up supply chains, contracts, collaborations, and every other aspect of business for organizations large and small. And no matter your company’s size, it’s essential to prepare for these changes so the transitions are as smooth—and profitable—as possible.
Above all, preparation means marshalling the proper expertise to avoid the possible complications of M&A activities. On the payable side, paperwork confusion or lapses can mean that invoices arrive to the wrong payee. And in the contract space, companies might continue going by old agreements instead of the new ones that accompany the M&A. This might result in overbilling, erroneous payments, unused rebates, return credits sent to defunct accounts, or other possible accounting errors. In other words: money left on the table, or unnecessary expenses.
Contract and recovery audits can help keep things in order, and keep payments flowing in the right direction. Performed by a third party in the months and years following an M&A, these audits take stock of the new business entity’s contracts and bookkeeping, and ensure that every clause and facet of the new agreement are being honored. Here’s how they might benefit you.
- Recouping Overpayments
The auditor can begin with a payables audit, looking at millions of lines of raw data covering every payment made by each company before and after the merger or acquisition. Comparing the pre- and post-M&A data allows auditors to identify overlapping supplier relationships and contracts. If overpayments are discovered, they can be recovered or listed as credits towards future payments. The auditor can also use the same data to identify the high-spend and high-volume suppliers from both parties and identify candidates for deeper contract audits and opportunities to gain pricing efficiencies for the new entity.
- Time Savings
Certain software programs can perform audits of this kind automatically, but the paperwork and supply chains that result from major M&A deals can be so dense that it takes months for whole auditing teams to wade through. A third-party audit can save your company the many man-hours that these analyses require. And since many of these payments are recurring, time truly is money: the faster problems are found and corrected, the less recovery is ultimately necessary.
- Contract Clarity
As stated above, contract and recovery audits aren’t performed immediately after an M&A closes. Instead, they typically happen 3 to 5 months after new contracts with the post-merger business are signed. This time frame allows the dust to settle and the new post-merger business to find its footing. And the wider scope makes it easier to recognize unused accounts, suboptimal suppliers left over from previous arrangements, or charges that don’t reflect the new contract terms.
- Procurement Insights
The best-case scenario, of course, is that everything’s in ship shape, with no overpayments due back to your company and total clarity on all sides of your contracts. But even in that unlikely event, the audit report can function as a welcome roadmap to the new supply chains, contractors, and accounting particulars of the post-M&A business entity. These entities are often so big, and so full of grandfathered-in supplier arrangements, that a clear outline of the resulting complexities can be a welcome guide to the lay of the land. Your CPO and their team might not fully know all the entities connected to the company they’re absorbing. This report can inform their work moving forward.
To learn more about how to most effectively stay on top of your contract and recovery plans following a merger or acquisition, contact us to speak directly with a team member from SC&H Group’s Contract Compliance Audit & Recovery Audit Services practice.