The Problem With Budgeting for Acquisitions
When preparing a budget, it is extremely difficult to estimate the impact of any acquisitions that may take place during the upcoming budget year. An optimistic president may want you to include several projected acquisitions in the budget, even though they have not been finalized. If so, the resulting budget will likely be well away from actual results, since the actual amount and timing of these acquisitions will almost certainly vary from expectations.
The actual circumstances of an acquisition are that several possible acquirees are monitored at all times, and one of them suddenly becomes more willing to accept an acquisition proposal. Which one of this group will be bought is impossible to predict even a few months in advance, as will the size, timing, and purchase price of the transaction.
Thus, given the massive uncertainty surrounding acquisitions, their inclusion in a budget essentially guarantees that the budget will not be a useful document when compared to actual results during the budget period.
The Acquisition-Free Budget
A better alternative that accommodates the needs of both the president and the rest of the company is to first finalize an operations budget for the existing business that does not include any acquisitions. This budget is used for all reporting purposes, such as budget-to-actual comparisons and bonus calculations. This version of the budget is included in the company's financial statements.
A spinoff version of the budget is then constructed for acquisition planning purposes, which the president uses to model the impact of possible acquisitions on the business. This model may be altered at regular intervals in response to changes in acquisition probabilities.
If the company actually does complete an acquisition, the regular budget for the company can then be revised to include the impact of the acquisition. This revision covers the remaining period through the end of the budget year.
This variation on acquisition budgeting makes it much easier to derive a budget that routinely incorporates the effects of acquired businesses, without generating budgets that are wildly inaccurate.