Your customer was acquired. Now what?

Knowing your customer is a core tenet of credit management. Getting to know your customer is not a single step taken at the outset of the relationship, but an ongoing process. When a customer is acquired by another company, there are several factors that go into learning the new business and reassessing risk.

Why it matters: Whether your customer’s business has been sold, merged with another business, consolidated or restructured, it is important to learn everything you can about their new organization to ensure your company is protected. “You are essentially dealing with a new customer,” said Michael Papandrea, Esq., partner at Lowenstein Sandler (Roseland, NJ). “You need to have them fill out a new credit application, or at least thoroughly vet that customer again.”

There are three fundamental facts you need to know about the new business entity:

Your customer’s legal name. “There might have been a change to their company’s structure making their name refer to only one division of the company so that their name differs from the legal name,” said Bruce Nathan, Esq., partner at Lowenstein Sandler (New York, NY). “This could have a drastic effect on your ability to collect because you may not be identifying the correct business entity.”

Type of business. “The key difference between different types of legal entities is the personal liability of the owners for the indebtedness of the companies,” said Nathan. “With a corporation or a limited liability company, its owners are not liable for the company’s debts, as a general rule. In limited partnerships, the limited partners are not responsible for the debts, but a general partner would be. If your customer is a sole proprietorship, it is not a separate legal entity, and the owner is responsible for all debts.”

Where the business is legally organized. Companies are often legally incorporated somewhere different from where they are physically located. “You may have a company that has its executive office in one state, but their state of incorporation is different,” said Nathan. “The state of incorporation or creation is very important for certain collection and risk mitigation tools that you might use.”

While these three points are essential to knowing who you are working with, there are still other important facts that help you fully grasp the degree of risk incurred through the business relationship. It’s important to take steps to understand how a company’s capital structure, subsidiaries, material affiliates and owners or parent companies may have changed following an acquisition.

It’s important to understand where your customer lands in its larger corporate structure and what new financial obligations it has taken on. When working with a company that belongs to a larger corporate family, it is possible that the specific entity that you are doing business with is insolvent or illiquid despite the stability of the larger parent company.

“The problem is, even if you’re lucky enough to get financial information, you may get consolidated financial statements where there are multiple entities combined together in the statement,” Nathan said. “And you don’t have specific financial information about the company that you’re actually selling to. If your customer is acquired by a larger company with multiple entities under them, you need to ask not for the consolidated statement, but for the financial statements, including the balance sheet and income statement, for the specific company or companies you are selling to.”

There are serious consequences when creditors cannot identify the business they are selling to. Lien and judgment searches will yield very little information when the entity is not properly identified. Down the line, should a collection dispute go to court, you run the risk of suing the wrong defendant, leading to dismissal or a worthless, uncollectible judgment.

The bottom line: It is easy to panic when you learn that a customer you’ve worked with for years is undergoing a major change. While gathering information on their shifting business structure may be intimidating, it’s important to remember that the process is not very different from onboarding a new customer.