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Protecting Acquiring Companies from Unforeseen Unclaimed Property Risks

Ann Fulmer, CPA, CFE - National Practice Leaders, Consulting & Advisory Services

March 25, 2019

The wave of increased merger and acquisition activities, seen across all industries, highlights a renewed focus on the risks and exposures related to unclaimed property sitting on the books and records of the companies being acquired. Unlike in the past, acquiring companies are beginning to recognize the potential liabilities that may be lurking on the books in the form of outstanding checks, dormant client balances, and unresolved suspense accounts; and worse, liabilities not on the books like amounts that have been written off or that may arise based on estimation during an unclaimed property audit. They are also taking a proactive approach to identify potential liabilities and taking steps to account for them during the due diligence phase of the engagement. As activity in private equity acquisitions and consolidation of companies continues to expand, acquiring companies are paying close attention to what they are inheriting.

The first step in providing protection to the acquiring company or private equity firm is the inclusion of a thorough review of unclaimed property exposure held by the company being considered for acquisition as part of their due diligence protocol. The review should be focused on identifying past and current practices related to the handling of outstanding checks and aged credit balances during the last 7 – 10 years. If records do not exist for this period of time, companies should document the reason for the lack of availability and focus on those that are available. If the company employed write-offs of aged checks or credit balances, it is important to gather support for the transactions including, but not limited to, name and address of the payee or customer and reason for the write-off if available. For example, if credit balances were written-off against outstanding debt owed by the same customer, it is important to be able to support this position to protect the adjustments from being considered unclaimed property. Additionally, this practice should be the same for voiding outstanding checks. If the outstanding checks were voided due to being reissued and subsequently cashed, support documents demonstrating that they are not unclaimed property will be valuable in the event of a future audit. State unclaimed property statutes place the “burden of proof” on the company in which the obligation resides; therefore it is imperative that sufficient and reliable records are readily available and accessible where at all possible.

On the other hand, if the company being considered for acquisition has a population of aged outstanding checks, aged credits due to clients, or client balances that are considered to be inactive, it is important to be aware of potential unclaimed property exposure before they become the responsibility of the acquirer. In order to take proactive measures to protect itself, the acquirer may want to consider the alternatives that are available to recognize the associated unclaimed property liabilities to ensure that they remain the responsibility of the seller. Solutions could include structuring the purchase agreement to identify the unclaimed property exposure and include terms within the agreement to clearly state the responsibility of the seller to remediate and report the transactions at risk within a defined period. Another remedy could focus on the inclusion of indemnification of the acquirer, and to compensate them for the unclaimed property exposures reported to the States after acquisition. This option has proven to be helpful for acquiring companies, especially when an audit is being conducted on the seller. Finally, some companies have taken a direct approach and reduced the consideration paid to the seller to offset property to be reported to the States.

No matter which approach is taken, the first step in every acquisition should be identification of the hidden risks sitting on the books and records so that steps can be taken to protect the acquiring company. The biggest risk is not knowing what you are inheriting. By being proactive, companies can protect themselves from future losses and require companies being considered for acquisition to “clean their closets” before infecting future owners.

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