Mergers and acquisitions are expected to accelerate this year as the economy looks forward to recovery. This could lead to an increase in multi-entity structures — a potential stumbling block for financial leaders. Manish Vrishaketu, COO at Tipalti says, here’s what leaders and teams should know.
As the pandemic subsides and the economy gains traction, merger and acquisition activity is projected to pick upOpens a new window  by the end of 2021. However, anyone who sees an advantage (or necessity) in consolidation needs to be aware of the challenges that come with creating a multi-entity company.
A multi-entity company is a business that’s divided into various subsidiaries, business units, or brands. All of them fall under the same parent company, but each has independent workflows, including separate finance functions.
Consider the case of Disney: The company runs theme parks, but it also produces movies and TV shows. And within its media production unit, it has separate operations for “Star Wars,†the Marvel universe, and more. The company encompasses many different brands and business units that operate independently, yet each contributes to Disney’s overall financial performance.
Multi-entity management isn’t impossible — Disney and others carry it out on a massive scale. But whenever core administrative functions like finance multiply in size and complexity (as they do after a merger or acquisition), it can be quite challenging. In these situations, it’s best to prepare accordingly.
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Issues in Multi-Entity Management
Control and reconciliation are the central challenges of multi-entity finance. More entities reporting to the head office means less control over how each of those entities manages its financial operations. It also means less financial data accuracy due to the complexity of managing multiple finance departments under one umbrella.
When multiple entities have their own bank accounts, jurisdictions, and tax structures, the parent company has two options: It can execute financial processes such as payments centrally, or it can run decentralized finance departments meant to support specific subsidiaries. The right choice is highly dependent on the resources (e.g., people, processes, and technology) at each entity and the parent company.
International companies also need to factor currency into their multi-entity strategy. And the parent company will need to manage the banking relationships for entities that don’t generate revenue and function strictly as cost centers.
For domestic and international companies alike, the optimism surrounding an M&A opportunity must be tempered by the reality of what’s to follow — multi-entity finance that’s vastly more complex than what came before.
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Getting Multi-Entity Finance Right
When entities and the head office aren’t in sync, it can lead to widespread inefficiencies. Much worse, it could cause a compliance breach or major financial mistake. Avoid those outcomes and bring new entities into the fold more effectively by following these tips:
1. Streamline processes for global subsidiaries and business units
Resources that are currently in place are probably inadequate for handling global multi-entity finance — especially for the first time. It’s a high-volume, high-velocity process that needs to be consistent and accurate, which is no small feat.
Most companies deal with this scale using automation technology to replace manual workloads and various financial management tools to link together disparate entities. Generally, they also deal with the specialized nature of multi-entity finance by hiring specialized staff. For instance, professionals with experience handling international payments can instill the tight governance necessary to avoid widespread mismanagement. The right talent combined with the right finance automation systems can make even the largest multi-entity companies operate as a cohesive whole.
2. Provide end-to-end financial capabilities in a single platform
Multi-entity management strives to make many entities operate as one. Technology can provide a platform that integrates multiple entities and uses automated workflows to manage the significant task of keeping all constituent data collected, organized, analyzed, and accessible.
Ideally, a single tool handles process automation for all entities in order to apply consistent control and mitigate reconciliation issues. A common mistake is thinking that end-to-end financial capabilities necessitate a spider’s web of separate technologies. A better approach consolidates the tech stack around a few financial management tools that can handle the majority of the workload.
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3. Manage growth and scale compliantly
Companies with a growing footprint have additional liabilities to manage. Moving into a new market creates more work for the finance department to manage. More problematically, this exposes the company to new compliance risks it must manage on top of a lot of other extra work.Â
Compliance support in the form of technology, consultants, or more staff helps a company encompass more entities without jeopardizing compliance. For example, transaction screen aids can quickly cross-reference transactions against international blacklists to prevent fraud and money laundering. Growth and compliance are always in tension, so it’s important to address this issue early.
Once a company learns how to manage multi-entity finance, it sets that stage for future M&A activity. Are you looking to grow within the next year? If so, ensure you have the robust back office necessary to scale as big as your ambition and vision allow.
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