Should you sell and do a leaseback?
Cash is King, especially in a buying market – and the trajectory for those contemplating either an acquisition or a merger to expand their portfolio, the timing and opportunities are both conducive in achieving a favorable business outcome. Performing due diligence when researching an acquisition target, is essential to optimizing the business outcome, and the depth and expertise this phase is executed is the primary factor in a successful acquisition.
Cash Preservation: M&A Impact of Compliance – ASC842, is an insight into the importance of compliance, from a business merger/acquisition perspective and can be overlooked when performing due diligence – as it is not generally perceived to be revenue impacting, so not on the critical path for most audit efforts. Supporting a compliance initiative, impacting EBITDA reporting, SOC1, and Compliance Disclosure Statement reporting, while creating an ongoing challenge with maintaining compliance. This is much more than an accounting issue, it is a business issue – which requires collaboration with experts to solve. Below is a summarized overview of the latest compliance impact on disclosure statement reporting:
Disclosure Requirements
Disclosure Objectives
Enable financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases
This level of complexity is commonly underestimated, as it’s exhausting, mundane spreadsheet analysis and reporting, typically performed in the trenches and without C-suite visibility. With economic projections of a significant ramp in M&A activity, the ability to meet these requirements, by leveraging a subscription-based lease accounting solution makes it easier for the acquiring party, as well as helps sellers in achieving the optimal valuation for their company.
What is the COVID impact on M&A Activity?
Although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus pose concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 5.5% in 2021 and 4.2% in 2022.
As we all attempt to do more with less, in our post-Covid virtual world, we are reminded of the importance of regulatory requirements, such as ASC842 / IFRS16 / GASB87, as having these requirements met with a subscription-based service – provides an easy acceptance for acquirers in addition to providing a portable service that can be quickly integrated with other portfolio companies – a private equity dream.
Divestitures – the Flip Side?
Successful companies actively manage their portfolios of businesses, identifying those with the greatest growth prospects and divesting others that no longer fit their overall strategy. But divestitures are easier in theory than practice, and many companies don’t achieve the anticipated value from the transaction.
Nonetheless, divestitures—if done right—can help companies transform faster and emerge stronger. Our analysis of US divestitures from 1998 to 2017 found that many sellers experienced higher growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the years following the divestiture. Such results varied over the years, but the share of divestitures associated with increased EBITDA growth has consistently risen, reaching 60% in 2017 as companies shed non-core and underperforming assets that dragged down valuation and used proceeds from those sales to fuel growth.
Transformation – No Room for Error
Whether you’re buying or selling, you want to make it quick and easy – as market conditions can change as quickly as one trading session. Taking on added risk, not achieving compliance, incorrect reporting, working on tasks that do not benefit your financial position, and lack the scalability that everyone involved in a transaction is looking for. This is an obvious process to outsource – Leaseology has a model that will benefit all, at a fraction of the cost.
Cash Preservation: M&A Impact of Compliance – ASC842
Achieving ASC842 / IFRS167 / GASB87 compliance is a subset of projects that cumulatively make up a lot of disciplines spread across multiple departments, requiring executive visibility, technology, accounting, real estate, and legal expertise. Although the effort is significant, the comprehensive enterprise cost, distraction, and effort are hard to scope, because the overall impact is both upstream and downstream.
Achieving compliance, which is why our customers are moving to Leaseology’s managed services to help align their lease accounting and lease administration needs to what’s required by the Compliance mandates, as well as the business itself.
The diagram below is the Leaseology service funnel, and we will use this model to help identify areas of risk for customers looking for a seamless consolidation of compliance requirements and ongoing support:
- Immediate Lease Compliance – Most are using Excel to achieve compliance, which is like painting a house with a Q-Tip, you can do it – but it will take 10x the effort
- Manually managing critical Date Notifications – There are no triggers, no calendaring function, no intelligence to scan spreadsheets and alert accounting – this is an audit violation waiting to happen – you need a solution, which is managed by experts to be true business agile and acquisition ready
- Lease Administration – This function requires a system, with controls and defined compliance processes that are automated. You don’t want to figure this out while staring at a balance sheet
- Disclosure reporting – print out a bunch of leases on spreadsheets, audit them to discern reporting specificity, then build a template and manually adjust terms. Now do this for every lease, every month.
- Technical Accounting – this is where the biggest risk lies, EBITDA ingestion and SOC1 reporting. To manually extrapolate these terms out of a lease portfolio, is a deal killer – pure and simple
- Lease negotiations – What market opportunities are there available to your company, right now? Time is ripe to reduce rental costs, sublet – lot’s of opportunities to improve cash position. Have you done your due diligence? Acquiring minds want to know.
- Document Management – add-in workflow, without a proper, formalized document repository, as well as not knowing where all your leases are – you will be eviscerated by auditors and it will absolutely weaken your position.
Cash Preservation: M&A Impact of Compliance – ASC842
Key Takeaways
- Focus on transforming your business – outsource lease accounting and administration
- Don’t lose the sale or a high potential acquisition because of lack of compliance, controls, reporting capabilities
- Lease Accounting subscriptions enable customers to avoid death by audit fees while providing a comprehensive service, experts to advise and a solution that is void of any peripheral IT support or maintenance costs.
Business Benefits of Outsourcing Lease Accounting, Administration & Management to Leaseology.
To be fair, there is nobody besides Leaseology that has yet to put together a model that supports all of the needs of a customer with a Compliance need, from every angle – as per our services funnel, there are a lot of facets to this diamond and we address all of them. We address all of them because we want you to avoid business disruption, by having to chase down one-offs, which are known by lease accounting Subject Matter Experts (SME’s). We can predict your future challenges because we have lived them.
The business benefits to a Lease accounting/compliance subscription from Leaseology are:
- Risk – Manual analysis of spreadsheets is the norm, and wrought with human error, due to lease fatigue, which auditors will gladly fix for $500 per hour
- Risk – EBITDA reporting errors can cost you a valuation of your company, market share, and business momentum. Technical accounting expertise is required to get this right, someone with decades of lease interpretation and guidance. Get it wrong and be ‘newsworthy’
- Agility – With the M&A and Divestiture activity ramping up, do you want to be the reason a transformative business opportunity is missed, because you weren’t compliant? This is a career-limiting approach
- Agility – You can write a check and validate our outputs and be done, or you can build an RFP, interview consultants, spend 7 figures, lose 12 months, hire a technical lease consultant, hire a leasing attorney, and do this while you are doing due diligence on an acquisition. Don’t worry – you can sleep Thursdays for an hour
- Cost – A Lease subscription will meet all of your business objectives, and free you up to do acquisition due diligence and stimulating enterprise activities, which actually grow the business. If you think you’re saving money DIY, you’re not – you’re also going to own the process of auditing spreadsheets and ferreting out lease details, and donating a lot of your personal time to figuring out month-end/quarter-end reporting issues. All the discomfort for zero business value – no bueno.
Leaseology understands what internal lease accounting teams are up against, and has built an end-to-end solution that allows customers to divert resources, remove cost, increase accuracy/locate cost savings opportunities – all while achieving compliance via an outsourced lease management process. The aforementioned service funnel is the core of the Leaseology managed services offering, to manage your lease portfolio and we are confident that our combination of industry expertise in lease accounting, compliance, reporting, and automation can help you meet the current and future ASC842 compliance requirements.
Ken Royce * Leaseology Inc * Board of Directors
Leaseology, Inc is a North America-based business advisory services firm committed to accelerated marketplace adoption of digital technology, financial management innovation, and business operations practice excellence. These core competencies apply to real estate and equipment portfolios.
