Integrating enterprise resource planning (ERP) software around a merger or acquisition can greatly reduce business complexities and costs. Determining how and when to do so, however, can be a challenge.
Learn more about the following key questions, topics, and processes:
M&A activity comes fraught with pitfalls for both sides.
Due diligence—identifying and quantifying those pitfalls—requires a comprehensive review of all assets and liabilities of the target company spanning fixed assets, talent, intellectual property, and more. Often overlooked yet important are the M&A process and technology integration considerations.
While technology such as email, infrastructure, and security solutions often have straightforward paths for harmonization, applications like enterprise resource planning (ERP) software that tie directly to business processes can become a significant challenge in some M&A deals.
Companies can experience cost increases and revenue leakage due to a variety of factors if post-merger integration of processes and technology are not planned and executed well. This can lead to lost revenue, increased transactional costs, and customer churn. Additionally, poor integration can lead to competitors taking advantage of the disruption by acquiring your customers and employees.
The ERP system software houses a company’s financial data and often extends to customer data, inventory, supply chain, and product- or services-related information. It’s vital to organizational planning and operations and is vital to how your company functions both externally and internally.
While sale price, culture, and customer overlap are all critical factors in due diligence, which ERP software the merged or acquired company will run needs to be determined early on.
In Which M&A Agreements Is the ERP Solution a Factor?
Not all mergers and acquisitions require it, but both sides need to think carefully about consolidating ERP solutions, whether capturing a new customer base, creating a joint venture, or adding a new business model.
In some cases, the acquirer is happy to let the target continue to run on its existing system with no need to tie into the new corporate parent outside of general reports and spreadsheets.
Potential M&A ERP System Transition Scenarios
There are a variety of factors that could affect the acquiring company’s approach to their ERP solution.
An aging ERP system software or an entry-level accounting system may be a warning sign of a lack of clear insight into the business and a maturity level in operating the business. While there are factors that could convince the acquiring company to wait until after the deal closes to worry about the ERP solution decision and undertake that process months later or longer, that may not be the best approach.
Consider consolidating ERP solutions if the acquired company fits these conditions:
- Doesn’t have an ERP system
- Uses only spreadsheets or QuickBooks
- Runs an outdated or legacy ERP solution that no longer meets the needs of the business
Capture a New Customer Base
Leakage isn’t confined to revenue. For example, when an acquisition intends to capture a new customer base, customers can still leak out to competitors during that transition if the CRM and ERP software aren’t in place.
The transition service agreement (TSA) costs can be prohibitive so the faster the new entity can be independent the more it will save in fees and other costs.
Joint ventures might require a decision on the future state of business systems if the two companies are standing up a separate entity that will require financials.
Those scenarios are often more comparable to private equity activity that doesn’t have the time pressure of a merger.
Add a New Business Model
Acquisitions that add a new business model, such as a traditional software company bringing in a software-as-a-service (SaaS) company or a computer hardware company buying an internet of things (IoT) business, require careful attention to the ERP software requirements.
For example, a company accustomed to standard fees for services or products likely won’t be familiar with revenue recognition rules and its existing ERP software may have difficulty supporting the requirements in this area.
Similarly, IoT businesses will need to integrate potentially thousands of new data sources. Financial systems that can properly account for and report on those new requirements are vital to the success of the combined company.
In cases like these, the difference between getting big chunks of revenue up front or the slow trickle of subscription fees can strain systems, particularly the lead-to-cash process.
ERP Software Implementation Considerations
Choosing an ERP solution should be informed by the planning that goes into the merger or acquisition.
Consider these questions:
- Will the two companies be operated independently?
- Will a single finance team or human resources (HR) team support both organizations?
If so, running two separate systems will soon become untenable.
ERP software implementations impact every part of the organization and can put tremendous strain on the finance team and others.
Under normal circumstances, they require a great deal of planning and effort, and around a merger or acquisition the same advice applies:
- Gather executive sponsorship
- Cleanse all data and verify its accuracy before transfer
- Invest heavily in training and user adoption
- Avoid simply migrating poor business processes to a new system
M&A Implementation Factors to Consider
Make sure an ERP solution decision is part of the M&A timeline.
A company moving an acquisition onto its existing ERP software needs to consider change management. An immediate ERP software migration can cause another disruption to an already chaotic time.
Training and Costs
Leaders need to weigh the implications of training staff on a new system and whether the benefits of consistent processes and a single source of data outweigh the disruption.
Unless both companies will operate independently, running two separate ERP tools can be problematic. The costs associated with licensing two different sets of software and, in the case of on-premises systems hardware and databases, finding and training staff on two systems can make moving worthwhile.
ERP Software Solution Acquisition: Example One
In March of 2011, Pfingsten Partners, a private equity firm, acquired SII Holdings, a manufacturer and distributor of playground equipment. Management felt it needed a system that could support its existing needs as well as future growth. It brought in consultants to create an IT infrastructure transition in the fall and began implementing a new NetSuite ERP system software by November.
Not everyone can work that quickly. Acquisitions can be tricky, as can ERP software implementations—a business might determine revenue leakage is acceptable if ERP consolidation would be too disruptive.
Even if companies decide to wait, ERP consolidation can be problematic. Plenty of implementations have been waylaid by poor planning or the wrong implementation partner, leading to lawsuits and worse.
ERP Software Solution Acquisition: Example Two
In some cases, the acquired company’s ERP system can add value to the deal.
iAutomation, a supplier of machine automation products and services, acquired Integrated Motion in 2007, the first in a series of acquisitions. The cloud-based NetSuite ERP software that Integrated Motion ran turned out to be a better platform than the mix of Sage Peachtree, Goldmine, and other on-premises applications iAutomation used and within a year the combined company was on NetSuite.
By 2013, it saw double-digit revenue gains to more than $70 million, and customer service improvements, better pipeline forecasting, and cross-sell opportunities due to the single system.
With an understanding of the type of M&A activity at stake, due diligence teams can begin factoring in when they want to bring in new ERP solutions, whether to install a new instance of their existing system, or let things continue until a later date.
As with a normal ERP system software implementation, there needs to be a project team that includes business process owners, IT, finance, and an executive sponsor.
With ERP tool implementations in M&A, it may take a larger team and one focused on the merger or acquisition as well.
Form a Steering Committee
Any ERP consolidation determination as part of an M&A activity is going to have a steering committee that can get input from all departments across all entities.
Successful ERP software implementation teams should include:
- Leadership member to champion the project and ensure resources are available
- Executive sponsor
- Project manager
- Cross-functional team members, particularly IT and finance
- End users
- Report writer
- Exterior evaluator to evaluate the target company’s systems
Replacing or augmenting an ERP solution may not turn out to be a top priority, revenue leakage or not, but it’s important for companies to understand all the ramifications of consolidating to a single system.
ERP software implementations, particularly on-premises systems with upfront investments in licenses and hardware, can be expensive and there are plenty of stories of ERP solution implementation failures.
Weigh the Risks
Costly consultants and software license fees aren’t the only area of risk. ERP implementations can be disruptive and delays are common. As ERP software vendors and consultants develop better implementation methodology, some of that risk abated.
Disruptive isn’t a word people want to hear during M&A activity. Scope creep can delay ERP solutions in an M&A-fueled implementation.
Both sides will want to limit the scope of the work, likely to core financials, then expand once the merger is complete. Businesses can now implement financials on a cloud-ERP system in as little as 100 days.
Companies need to do a significant evaluation of workflow and processes before an ERP implementation.
If the two companies have processes highly specific to the business, such as invoicing or inventory management, they will need to decide which to use, adapt both, or follow the practices of the ERP software vendor to avoid excess customization.
That can all delay an implementation or even lead to billing problems, stockouts, or excess inventory.
Internal IT Expertise for ERP Implementation
Larger companies with more experience with acquisitions might have a well-documented restructuring process and internal IT resources to help with integrations or ERP implementation.
The resources and expertise at the company being acquired can help. As with a general ERP implementation, it’s often a good idea to bring in outside help with expertise in ERP implementations.
Companies may have trouble wading through the thousands of people with websites calling themselves ERP software consultants or get scared off by the huge figures the big systems integrators charge. M&A teams can rely on general ERP implementation processes to provide a guide through similar difficulties.
M&A teams should ensure their ERP implementations team has:
- Sufficient technical and business skills
- Understanding of the specific industry
- A track record of success
- Honest experience and credentials
Licenses and Install Base
Consider licensing issues in a merger of companies of similar sizes moving to a unified ERP solution. Who’s got the bigger install base and which is going to be more expensive to switch out? And what are the licensing costs?
A big increase in users can be tricky to negotiate with an ERP software vendor, as can merging two ERP software contracts. The length of existing deals can affect the decision of when to move to a single system, but that’s usually outweighed by the business need for the merger in the first place.
With on-premises systems, licenses are typically paid for up front, with businesses paying a percentage of those licenses for ongoing maintenance such as patches and new releases.
By consolidating systems, companies no longer pay that additional maintenance fee, a charge many are happy to be free of since they don’t believe it brings much value.
Cloud-based ERP solutions are based on a per-user basis, with contracts typically between three and five years.
Moving away from that additional ERP solution before the contract is up may mean the acquiring company needs to eat those costs, something they need to account for when determining when to consolidate systems.
ERP Implementation Timing
Timing is always a consideration in M&A, and ERP implementations have been known to take years and consume resources.
For a company considering an acquisition as an exit strategy, undertaking their own ERP implementation might be a smart move.
Cloud-based ERP software that requires few, if any, IT resources and can be deployed with an internet connection and a browser offers a faster, easier implementation. Some systems featuring core financial functionality can be implemented in as little as 100 days and can be up and running months after the deal closes.
The Two-Tier ERP Solution
If an acquiring company runs a larger, older ERP solution and doesn’t plan to implement a new instance of software at a new acquisition, it might turn to a two-tier model with a newer, easier to implement—typically cloud-based—system at the acquired business.
A cloud-based ERP software can use pre-built integrations to feed information to the corporate parent while giving the acquired company the agility it needs to continue operations.
How Upgraded Is the Company’s ERP Solution?
It’s important to consider the level of ERP expertise.
Determining how the company to be acquired manages financials and automates key processes is an important part of the due diligence phase.
Ready for an Upgrade
In a smaller, early-stage, founder-owned scenario the target company often runs QuickBooks. This can mean easier reporting and less of a need for an immediate ERP implementation, but it’s also an opportunity to add systems and build out capabilities.
Timing is critical. A key decision must be made when the early-stage company goes through some growth—geographically, in complexity, or otherwise—and is evaluating an upgrade from QuickBooks.
Keep or Replace a Legacy System
More established companies may already have an ERP solution running on older, on-premises software and due for an upgrade.
In these cases, companies must decide if a new implementation will be part of the acquisition or postponed until the licenses run out.
An acquired company with an older, on-premises system will likely need it replaced, and the cost of that should be factored into the deal. Older systems require IT overhead.
ERP software vendors are shifting their resources to cloud-based products instead of investing in legacy systems which will quickly fall out of date.
ERP Implementation Mistakes in M&A
Even if an organization includes ERP solutions in due diligence and determines it’s worthwhile to implement a new system before or immediately after an acquisition, there’s no guarantee it will go well.
ERP software, like business, can be complex. Not having the right people on the steering committee and not capturing input from every contingent in the company are typical mistakes.
The typical challenges with an ERP implementation obviously apply here as well: poor data quality with the source systems, poor data migration, a vendor that doesn’t understand the industry, or lack of executive support.
We’re Here to Help
To learn more about ERP solutions, contact your Moss Adams professional or visit our Netsuite Implementation Services as well as Transactions Services.