Looking to get acquired?
If you are using Excel as your accounting software, the acquisition process will likely involve unnecessary levels of pain for both you and the acquiring company. A quick Google search of Excel nightmares reveals page after page of basic errors that any company, of any size, can run into using Excel for accounting software.
Whether such errors are due to human error, or assumptions built into the Excel software, using Excel for accounting will result in errors. Excel is a powerful tool, and it serves the business world quite well, but it was not designed to be an accounting software package. An acquisition is a perfect scenario to highlight the risks involved of running accounting solely in Excel.
Compounding Errors Reduce Your Valuation
The first stage in any acquisition is the valuation stage. During this stage, an interested acquirer will take a brief peek behind the curtains of your company. A key component of this peek is a detailed look at your financials. If you reach this point with an acquirer that has previously looked into buying a company with spreadsheet-based financials, the moment the acquirer learns that your financials are solely run in Excel, a single thought will seize the moment: human error.
Human error is an inevitable element of Excel. Whether the human error occurs through manual data input, copying and pasting errors, or incorrect formula creation, human errors are a certainty. Imagine you use an Excel-based income statement or balance sheet full of equations. Until an error is reported, you rely on the underlying, human typed formulas year after year. The longer you go without recognizing the error, the more the inaccuracies compound. Accordingly, you can’t afford to rely on a Excel for your long term accounting software strategy
Consider the sale of Tibco Software to Vista Equity partners. Vista Equity managed to save $100 million on the almost $4.3 billion transaction because of a simple spreadsheet error that overstated the count of fully diluted shares.
When it comes to accounting via Excel, it’s not a matter of if an error will occur, it’s a matter of when the error will occur. In the event that the error affects the valuation of a target company, as in the Tibco situation, a single error can have drastic consequences.
Spreadsheets Slow Down Due Diligence
Imagine you make it beyond the valuation stage without your Excel-based accounting strategy causing any hiccups. Great! But before you get too excited, the next phase of the acquisition—due diligence—is sure to frustrate both you and the acquirer.
During due diligence, the acquirer will take a deeper look at your business, and any liabilities that might come along with it. When diving into your business, the acquirer will start planning how your business might integrate with and impact its existing business.
The acquiring company will want to run reports and create models that utilize every financial document you can get your hands on—financials, balance sheet, income statement, revenue forecasts, accounts receivable, reserves, the list goes on.
Retrieving such documents and running reports out of Excel is not a built-in functionality. If you can manage to pull the reports out of Excel, the acquirer will ideally be able to run the data through its own financial tools, and export the data to its outside consultants for a run through their systems and tools. Excel is very limited in its ability to integrate with third-party financial and accounting systems.
In turn, both the acquiring company, and outside experts will spend a great deal of time and resources manually extracting data from your Excel spreadsheets and inputting the data into their own tools. In the end, this raises the cost of the acquisition, slows the due diligence process, and decreases the overall value of the deal.
Integration and Audits Will Be Stressful, and Maybe Impossible
If you manage to get through the valuation and due diligence stages without your Excel-based accounting destroying your deal, integration with the acquiring company is sure to cause its problems.
First, Excel is not designed to migrate into new systems. Typically, a key element to the acquisition for the buying company was an element of efficiency to be realized by eliminating redundant cost centers, and utilizing common infrastructure. An obvious target to realize efficiencies is to transition your company onto the accounting platform of the acquiring company. Because Excel is not designed to migrate, not only are the efficiencies unrealized, the problem is likely to cause inefficiencies associated with the manual transfer of your company’s data to the new system.
Perhaps the acquirer determines that migrating your Excel-based accounting into their systems is simply too difficult, or too expensive. Instead, your portion of the business will remain on Excel. In doing so, the acquirer has most likely threatened any financial compliance scheme currently in place at the acquiring company. Whether the compliance scheme is in place as required by law, or it has self-imposed the compliance policy for quality purposes, Excel has no built-in financial compliance mechanisms.
For instance, audit trails are key to any financial compliance policy. Whether the audit trail is used for reconciliation purposes, financial investigations, or fraud prevention, an audit trail is core to financial accountability. Cloud-based accounting software like QuickBooks has a built-in audit trail. Users can see when a transaction was altered, who altered the transaction, accounting policy changes, and much more. None of these features are available in Excel.
If you are acquired by a publicly-traded company, the compliance issues associated with Excel-based accounting grow exponentially. Sarbanes-Oxley (SOX), requires that the accounting systems of publicly-traded companies include certain internal controls. Such controls include audit trails, certain levels of security, redundancy, and accuracy. With Excel, achieving SOX compliance is essentially impossible. Accounting software is designed with such compliance requirements at the core of its design. If Excel doesn’t cause enough problems internally, it could certainly get you in trouble from a compliance standpoint the longer you rely on it for accounting.
Professional Accounting Tools Pay for Themselves
Without a doubt, Excel is a powerful financial tool and it is appropriately relied on for many accounting operations. However, relying on Excel as your foundational accounting software is a dangerous practice. If you don’t realize this, and change practices before you start to sell your business, the acquisition process will no doubt affirm Excel-based accounting as a bad practice.
Whether Excel kills the deal at the valuation or due diligence stage, or spikes costs and headaches at the integration stage, Excel-based accounting is a perfect recipe for a rocky relationship with your acquirer.