How can financial forecasting help with M&A activity?

Financial forecasting is vital for M&A activity as it helps in assessing the target company's value and risks, enabling acquirers to make informed decisions. It aids in integration planning, identifying synergies, and planning for the necessary capital investment. Financial forecasts also play a key role in valuing the target company and structuring the deal. Additionally, they facilitate stakeholder communication and regulatory compliance, ensuring a smoother M&A process and post-merger performance evaluation.

Financial forecasting is not only key to closing M&A transactions but also to post-close integration planning. Leading up to and through acquisition closing, certain assumptions are made about what will occur post-close, such as how the companies work together, what will happen to the acquiring and target management teams, what synergies will be achieved, and what are key criteria for a successful integration. To be realized, these assumptions need to be carried from the deal close to post-close. Action plans must be developed around each integration assumption. Business owners need to be identified and agreement around key measurement criteria to ensure successful integration all must be visible and measured on a consistent basis.

A financial forecast that clearly identifies the post-close expectations for employees, customers, suppliers, etc. is the first step in planning for a successful transaction. A financial forecast is reliant on alignment from a pperating perspective. It is only with a business plan that you have what you need to communicate effectively with all constituents. Employees want to know what impact it will have on them. Without effective communication, employees "worry" and may assume the worst. People are your greatest asset and you don't want to lose key employees on the acquirer or acquiree side. Communicating with customers and suppliers, likewise, is key. Forecasting is the foundation for effective communication to all impacted.

Very often the most obvious question is not precisely answered - what role will the seller play post-close? This seems so obvious, but I have seen it go wrong more than right. Everyone is excited about a M&A transaction when it is in process. The seller/owner is motivated and excited about the sale. The buyer is excited and believes the seller will be a great "fit" in the post-close company. But, so often, the seller can't adjust to working for a larger company where they no longer call the shots. While all the best intentions at the time of the transaction, there is a cultural misfit post-close. The acquirer needs to have serious, open, honest conversations about the seller role post-close, in an attempt to avoid post-close surprises.