Solved: multi-company mergers and acquisitions
The fastest-growing real estate organization in the last 10 years are growing through mergers and acquisitions or through franchising.
It seems common sense that a larger organization should be able to realize big savings by removing redundant back-office operations. In reality, the accounting departments in these large organizations often become bloated and less financially efficient when measured on the metric of accounting department costs per agent.
In multi-company organizations, the accounting department needs to keep distinct financial statements for each company under its “umbrella”. Each company in a multi-company has different ownership. This means that each set of owners needs to get their own Profit and Loss report and maintain their own balance sheet. Maybe most importantly, each set of owners wants to retain control of their own cash. For operating bank accounts or commission accounts or savings accounts, the owners in each entity expect that their money is not co-mingled with the cash of other companies in the group. Further, the individual owners need confidence that their success (and consequently their cash) is not being used to prop up less successful companies under the same umbrella.
Franchise reporting is another critical task of the accounting department, but in this case, the work is the exact opposite of the financial statement work. For franchise reporting, the accounting department needs to “roll-up” the combined performance numbers of all of the companies the organization “owns” and present them to the franchise as a single entity.
In this white paper, we will examine a highly successful Sotheby’s franchise in New York. We will show how AccountTECH solves the reporting and operating challenges for this large and fast-growing company.
The accounting department in any multi-company operation has to solve these problems:
- Login / logout all day for accounting staff as they “switch” between the different company accounting records.
- Prepare separate financial statements for each company under the “umbrella”.
- Manage and reconcile cash for each entity.
- Distribute financial statements and other productivity reports to the owners without sharing the “numbers” of other owners.
- Provide online distribution of company-specific reports that gives information to each set of owners about only the company that they own.
- Manage Pay-To-Pay-From. This critical function consumes endless accounting hours as accountants keep track of every inter-company loan. All multi-company organizations move money between the companies to pay bills. For the company lending the money, they need to have an asset on their books for the amount loaned. For the company borrowing the money, they need to have a liability on their books for the amount borrowed. These numbers need to be perfect and take a lot of time to maintain.
- Manage front-line staff access. In these large companies that are geographically distributed, front desk clerks and transaction coordinators need to be restricted to only have visibility to the agents and transactions that fall within the “company” that they work for.
- Provide reporting to staff that gives information to employees about only the transactions and agents in the company that they work for.
- Report to their franchise with all of the combined data for all of the companies presenting as a single entity.
- Provide company-wide analysis that lets the leadership see:
- All the companies separate financial reports and production reports side-by-side.
- Cumulative reporting that shows totals for all of the companies combine.
- Benchmarking that lets the leadership define performance metrics to hold managers accountable.
- Reports that show performance by region. Sometimes a region will include offices that belong to two or more companies - and sometimes a region is defined by an area covered by a specific manager. In this case, the leadership needs the freedom to define a “region” any way they choose, and then run reporting for that region.
Multiple companies. One software application.
AccountTECH’s darwin full accounting suite is designed to allow users to add an unlimited number of companies and the software keeps track of completely separate financials for each. Each company can have an unlimited number of offices and an unlimited number of agents. Staff login once at the beginning of the day and can work on all of the different companies that are owned by Sotheby's in the same system at the same time. Cut commission checks, manage direct deposits, pay bills, charge agent credit cards...all from within a single software application. As users work, darwin is constantly aware of which company should get the credit for the accounting work being done and automatically posts the activity to the correct entity. This ability to have users working in multiple companies at the same time allows Sotheby's to always have real-time profit and loss reports for each company.
Unified Chart of Accounts
AccountTECH system provides for a unified Chart of Accounts that is shared by all of the different companies owned by Sotheby's franchise. If you look in-depth at the Chart of Accounts you will see that there is no need to create “sub-accounts” for each of the different companies (example 1). AccountTECH keeps track of which company and which office each expense is linked to.
This means that when you run Profit and Loss reports, regardless of what company you are reviewing, there is a consistency to the reporting.
As Sotheby's grows they can continue to add additional companies to their organization and each new company will share the chart of accounts and the simplicity for staff of continuing to work in all of the companies from a single login (example 2).
Financial reporting for multiple companies
With all of your companies in a single database, users can run side by side Profit and Loss reports by company. These reports let users see the comparative strength of each company (example 6) and include drill down (to 3 levels of detail) to look deeper into the details (example 7). One of the key benefits of having all your companies in one system is that you always have real-time financial data for all your companies without having to perform extra adjusting entries or MS Excel manipulation of the data after month close.
A key benefit of having all your companies in one system is that you always have real-time financial data for all your companies without having to perform MS Excel manipulation of the data after month close.
For our Sotheby’s franchise that uses budgets to keep their companies on track. Having the ability to view all of their companies side-by-side doesn’t mean they can’t examine their companies one at a time. For budget reports, they can select just one of their companies and analyze it in depth (examples 8 and 9).
Report distribution simplification and automation
Distribution of real-time financial reports used to be a time-consuming process because after month-end the accounting department needed to print multiple versions of the Financial and agent production reports so that each manager only saw data for the companies and offices that they were managing.
Now, with AccountTECH, your accounting department can use the web reporting portal from AccountTECH and give every manager the same reports but each manager sees only the data that pertains to them. This is made possible by the security model in AccountTECH that lets you select for each user the companies and offices that they should be allowed to see. Using these security settings, our Sotheby’s franchise is able to give all managers the same library of reports knowing that when the reports are viewed they will only show the manager the data that they are supposed to see (example 10).
Another issue that our Sotheby’s has discovered is that some managers never log into the portal to view their reports. To solve this problem, they have used the built-in email campaign tools in AccountTECH to deliver certain reports to their managers automatically on schedule (example 11).
Automatic posting of revenue to the correct company
One key requirement of multi-company accounting is the ability to post revenue and expenses to the financials of the correct company. For commission revenue and expense, our Sotheby’s franchise manages this in AccountTECH by tracking which of their companies each agent and each transaction “belongs to”. Since each agent profile is linked to a specific company and a specific office in that company, the commission revenue and expense for each agent automatically flows to the Profit and Loss of that company and that agent’s office (example 3).
Automatically posting expenses to the correct company
Whenever our Sotheby’s franchise is entering accounts payable, they start out by selecting which of their many companies the expense should be charged to. This guarantees that every expense will be “on the books” of the appropriate company (example 4).
Paying bills from the correct company
When paying bills in AccountTECH by check or direct deposit, there are controls in place to make sure that each bill can only be paid for each Sotheby’s company using only the bank accounts that belong to that company. When setting up their bank accounts, our Sotheby’s franchise specified which company owns each of the bank accounts they added to AccountTECH (example 5).
When paying bills, our Sotheby’s franchise first selects which of their companies they want to pay bills from. The software shows them a list of open payables that is filtered for only the bills of that company. Additionally, the list of checking accounts that can be used for payment is restricted to only include the checking accounts that belong to that company. So, once the desired checking account is selected, they simply pay by direct deposit or printed check (example 12).
Any experienced CFO for a multi-company real estate organization knows that managing cash transfers between companies is a big, time-consuming yet critical task. Different companies have different “seasons” and different cash flow, so large organizations are always moving cash between different companies to help out with cash flow.
Every time there is a “loan” from any of their companies, the company that made the “loan” needs to not only transfer the funds, but they need to book an asset on their balance sheet that tracks specifically to the company that received the funds. Then, of course in the company that received the funds, they need to book a liability for the funds borrowed. When cash flow improves, the company that borrowed money will need to record the payment of the “loan” to reduce the liability on their balance sheet - and the company that made the “loan” needs to make an entry that increases cash and reduces the loans receivable asset on their balance sheet.
It’s a lot of work. And it’s really time-consuming. And it’s prone to mistakes. And auditing these entries to balance them is even more time-consuming. But for our Sotheby’s franchise, this is no work at all because AccountTECH does all this Pay-To-Pay-From accounting automatically. Here is how they do it:
Whenever they are entering a bill to pay a supplier, it is possible that the bill they are paying is on behalf of one of the other companies in the organization. So when entering the bill, a user can flag the bill to be recoverable from the other company that they are paying for (example 13).
So the company paying the bill (in this example that is Sotheby’s Syracuse) is paying a bill on behalf of another company (in our example that is Sotheby’s Manhattan). Sotheby’s Manhattan is going to need to have this bill on their books to pay back to Sotheby’s Syracuse. And when the bill is entered in Sotheby’s Manhattan it has to be expensed correctly. This means that it needs to be charged to the correct office and the correct expense account.
To automate this, when Sotheby’s Syracuse is entering the bill, the user will specify where the bill should be expensed on the books of Sotheby's Manhattan (example 14).
Then the user will finish by entering the description and the amount owed to the Supplier. When finished the user will POST the bill and pay it (direct deposit / print check) (example 15). It is what happens AFTER this bill is posted that is the most powerful (example 16).
Once this bill is entered, AccountTECH automatically creates an invoice receivable to track that Sotheby’s Manhattan owes us to pay us back for the bill we are paying for that company (example 16).
And the software automatically enters the bill in the other company (Sotheby’s Manhattan) to pay us back for the items we paid for them (example 17).
The take-away is that all the billing is complete. And all the Pay-to-Pay-from is complete and balanced:
- The Vendor is paid.
- The Invoice receivable is on the balance sheet for the amount owed to Sotheby’s Syracuse from the other company.
- The Payable is entered automatically in Sotheby’s Manhattan for the amount owed to Sotheby’s Syracuse.
Most large multi-company operations and Franchise have many companies that they manage in AccountTECH. So for these operations, when they enter a bill for payment, it likely includes expenses that are “billable” to many of their other companies. The technology in AccountTECH allows unlimited detailed charges to be added on every bill (example 18) but it also allows for the situation where Office 1 is paying a bill on behalf of Office 2 - and in Office 2 there are some line items that need to be charged back to some Agents in office 2 for reimbursement. In that scenario, while Office 1 is paying the bill, they can not only charge Office 2 for paying back the bill, but simultaneously flag the pay back bill in Office 2 so that the agents in Office 2 are automatically invoiced for reimbursements due (example 19).
Managing many different companies and maintaining multiple distinct sets of financials can be a lot of demanding and time-consuming work. The support for multiple companies in a single system within AccountTECH takes countless hours of work out of the labor cost of the accounting department. The technology improves reporting while increasing accuracy.
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