How to avoid the financial risk of M&A The biggest risk is financial risk.

As we all know, the biggest risk of enterprise merger and acquisition is financial risk. Reasonable estimation of financial risks, correct understanding of the shortcomings of financial statements and minimizing risks in a prudent and prudent way are three important aspects for enterprises to avoid financial risks reasonably in the process of mergers and acquisitions.

Reasonably estimate financial risks

Only by reasonably estimating financial risks can we effectively avoid risks.

Modern enterprise mergers and acquisitions involve a large amount of money, and it is a common practice to solve the capital problem through refinancing. No matter how complicated the financing arrangement is, it is based on a series of controllable rights in the process of mergers and acquisitions to obtain financial support. However, financial risks, especially some off-balance-sheet financing projects and overly optimistic profit forecasts, will make the acquirer have an "illusion" about the real assets, liabilities and future cash flow of M&A, thus affecting the choice of refinancing tools, which is directly related to the financial burden of the enterprise and the transfer of operational control rights after the completion of mergers and acquisitions.

Understand the shortcomings of financial statements

To avoid financial risks, we must recognize the shortcomings of financial statements.

1. Accounting theory lags behind.

Under the framework of China's existing accounting standards, accounting statements cannot reflect all financial management behaviors of enterprises. The current accounting statement system is based on accrual basis and historical cost valuation, and the traditional accounting measurement and confirmation methods are becoming more and more inadequate and cannot be effectively disclosed. However, the promotion of fair value accounting in enterprises lacks sufficient theoretical basis and practical experience. Thus, the relatively lagging development of accounting theory is one of the important reasons for the objective existence of M&A risks.

2. Accounting policies are optional.

This selectivity makes the financial report or evaluation report itself manipulated, and the most typical example is the earnings management behavior of a large number of enterprises. There are also many methods and standards to choose from in important matters such as intangible assets evaluation and profit forecast. If the accounting policies and changes related to major events are not fully and timely disclosed, the information asymmetry between the two parties will be caused.

3. Can't reflect accidental events and future events.

The core of financial report-financial statement can only reflect the financial status, operating results and cash flow of an enterprise at a certain point or a certain period. Because accounting data pay attention to authenticity and verifiability, financial statement data are basically based on past transactions and events. Some provisions based on the principle of conservatism, such as bad debt provision, inventory depreciation provision, long-term investment impairment provision, etc. , are basically based on historical experience data. This makes some important contingencies (especially contingent losses) and afterwards events often ignored or deliberately concealed, such as pending lawsuits, major after-sales returns, natural losses, external guarantees and so on. , directly interfere with the judgment of enterprise value and future profitability, affect the determination of M&A price, and even bring unnecessary legal disputes to mergers and acquisitions.

4. Can't reflect all the financial behavior of the enterprise.

At present, the acquirer is concerned about the large amount of off-balance-sheet financing behavior of China enterprises. The motivation for enterprises to carry out off-balance-sheet financing is very simple, that is, to avoid the reflection of financing behavior in accounting statements, which will lead to the deterioration of financial situation and affect the refinancing of enterprises. Its essence is to prevent financial statements from reflecting the real financial information of enterprises and blocking the transmission of negative information through "clever" means. The main means of off-balance-sheet financing are: financial leasing, leaseback, asset securitization, accounts receivable credit and so on. The innovative off-balance sheet financing mainly includes: mutual mortgage guarantee financing, mutual creditor's rights transfer and so on.

5. Can't reflect the value of some important resources and institutional arrangements.

Sometimes, financial statements can't reflect the important resources that are indispensable for the sustainable operation of modern enterprises, such as important human resources and franchise rights. At present, people are concerned about how to reflect the pricing model of human resources and related incentive and restraint mechanisms in financial statements, especially the financial impact caused by the executive stock option system.

Minimize financial risks

It is the best way to treat the potential risks in enterprise merger and acquisition with the principle of stability and prudence.

1. Adhere to the principle of taking finance as the foundation.

"China enterprises' overseas M&A may have multiple objectives, such as occupying market share, acquiring resources, exerting synergy and realizing international operation, but they must adhere to the principle of financial orientation and grasp financial risks. Zhang Jianjun, Director of M&A Services at PricewaterhouseCoopers, said that information is the key factor for the success of the transaction. Many M&A transactions often have a series of financial risks, such as the mismatch of financial system, the assumption defect of investment return prediction, unscientific evaluation and pricing of tangible and intangible assets, improper post-transaction planning and so on. This is mainly due to the lack of M&A experience in China enterprises and the information asymmetry between the two parties.

2. The acquirer shall employ an experienced intermediary.

Including securities firms, accounting firms, asset appraisal firms and law firms, to further confirm the information and expand the scope of investigation and evidence collection. Asset evaluation is the demand of both parties to the transaction, which provides a basis for the two parties to negotiate pricing. Especially in the merger and acquisition of state-owned enterprises, the importance of asset evaluation has been reflected in the relevant provisions of the state. For example, the Measures for the Administration of State-owned Assets Evaluation stipulates that economic activities such as asset transfer, enterprise merger and acquisition, enterprise sale and enterprise joint venture must be evaluated.

3. Sign relevant legal agreements.

Legal documents, contracts and transactions include documents, obligations, governance, confidentiality, non-competition, statements, guarantees and compensation. Among them, representation and guarantee are very important, which means that in the contract, the buyer and the seller can ask the other party to make representations and guarantees on the procedures or materials of certain things. Due diligence can't do every detail, and we don't know whether the documents are correct, so it is very important to ensure the correctness of the enterprise in key aspects. Generally speaking, the terms of representation and guarantee include ownership and share capital, companies and branches, legal affairs, financial statements and records, business, assets and real estate, contracts, bank accounts and loans, directors and employees, taxes, etc.

Because the acquired party intentionally conceals or does not actively disclose relevant information, every M&A case has more or less financial risks. This requires us to be prudent in actual operation, ensure the correctness of all assumptions in the operation plan and check the consistency of all data, and use financial data to confirm the determined strategic objectives. Only the perfect combination of excellent financial operation and accurate industrial judgment can successfully avoid financial risks in the process of mergers and acquisitions.