What to do when your customer gets acquired: Your next steps to secure collection rights

Acquisitions bring about significant changes for companies, often involving major shifts in ownership, leadership and culture. Companies may experience restructuring to increase efficiency, integrating technology or talent, changing reporting structures and altering customer services. Typically, there is no disruption to the order-to-cash cycle. However, contacts may change, making it more challenging for credit managers to stay in communication and collect payment.

Why it matters: In learning that a customer has been acquired or has acquired a company, it is important that credit professionals understand the specifics of the transaction and act accordingly to secure collection rights and continue doing business with the customer.

An acquisition is a financial transaction in which one company purchases another, obtaining control over its assets, operations and management. These transactions can happen for various reasons. Companies may be seeking economies of scale, diversification, greater market share, increased synergy, cost reductions or new products and services. It may also serve as an opportunity to eliminate competition. In such cases, the target company may be taken over completely or remain operational as a subsidiary under the parent company.

Determine if you need a new credit application

One question that often comes up is whether to have the acquired company sign a new credit application or continue under existing terms. According to an eNews poll, answers vary. Of the credit professionals surveyed, 43% said they always require a new credit application, while 27% said they only do so when the legal entity changes.

“There is little that we can do to verify a new company’s credit history if there is none,” said Barry Rose, CBF, CCRA, credit manager at Diamond Plastics Corporation (Grand Island, NE). “We always get a new credit application to know exactly who we are dealing with for record-keeping purposes. As a manufacturing distributor, our customers buy for resale and are required by law to provide us with a tax resale certificate for each state they do business in, and the permit number included gives us the legal documentation to sell to them on a tax-exempt basis. If the corporation changes, they will need a brand-new sales tax permit included with the application.”

However, it can be challenging to obtain a new credit application, especially from companies that have been acquired by private equity firms. The firm may not provide consolidated financials, parent guaranties, deposits, letters of credit or other traditional forms of support. Oftentimes, the financials provided do not accurately reflect overall risk.

To expedite the process, credit professionals may place the account on hold. “For companies that refuse to submit a new credit application, I place their account on hold or only accept cash on delivery until they get a new credit application,” said Betsy Rhodes, CCE, treasurer at Metal Specialties, Inc. (Odessa, TX).

Credit and sales teams can work in tandem to maintain open lines of communication with acquired customers. Sales can assist in gathering information, obtaining credit applications and establishing relationships with new owners and contacts.

“Our sales team knows that if they hear that someone has been bought out, we need new documentation as soon as possible to get the new account set up,” said Lisa Saul, CBA, credit and collections manager at Victaulic Company (Easton, PA). “On occasion, we would accept a form that includes the same information that would be included in a credit application in place of a standard credit application, though it’s not preferred. We may gather financials and W-9 forms from new entities.”

Apply KYC practices

Practicing Know Your Customer (KYC) is key to mitigating risk during acquisitions. “Early on, I learned to dig deeply, ask questions and use all resources to identify the financially responsible party,” said Saul. “This ensures that the account is correctly linked to the appropriate parent company.”

Even if the legal entity name has not changed, it is important to gather company information, reassess credit risk and establish a relationship with the new owner or owners. “We try to gather information on ownership and ask who they do business with,” said Rose. “We look at bank references and the Secretary of State website to assess the acquiring company’s creditworthiness, including how much capital they are bringing in and how they were formerly structured. Most importantly, we find out what has changed, who the new people are and whether there will be any changes in the way they pay us.”

Monitoring exposure closely, adjusting credit terms and considering tools like trade credit insurance where appropriate are all steps credit professionals can take during this process. “Usually, companies will purchase a company that has solid financial footing,” said Rose. “However, some will purchase a higher-risk customer because they want to have a presence in that area.”

Credit professionals, especially those handling a large volume of accounts, cannot keep track of every acquisition. Practicing due diligence and conducting regular reviews can help them stay informed and adapt. “I make sure to pull credit reports and refer to Corporation Wiki, where I can search for company information from the CEO to associated companies,” said Rhodes. “As part of the West Texas Oilfield and Industrial Credit Group under my local affiliate, NACM Southwest, I have access to weekly reports that reveal information on new acquisitions, which include new owners, and that helps a lot.”

Bottom line: Working with acquired businesses is always a challenge. With the right approach, credit professionals can maintain customer relationships without losing protections.