A multi-beneficiary account opened amid SVB’s demise may help ease future M&A legacy bank account pain.
Silicon Valley Bank’s failure in March set off a mad scramble at corporates with funds at the bank, including one NeuGroup member company that found itself exposed to risk from legacy SVB accounts inherited through M&A deals. A solution the company adopted, suggested by one of its main banks, may offer some relief to the pain caused by legacy accounts that many treasury teams endure during M&A integrations.
- The company hopes the concept of a single, multi-beneficiary account it opened to accept payments for entities with SVB accounts will work for future acquisitions, shortening the time legacy bank accounts must remain open to accept payments and eliminating the need for multiple new accounts to replace the old ones.
Accept on behalf of. The risk faced by this member of NeuGroup for Tech Treasurers arose from acquired companies using SVB accounts to accept payments from their customers. The initial fear—before the Biden administration said it would make all depositors whole—was that payments made to those acquired accounts might never be accessed by the parent company.
- The refreshingly simple solution the member’s bank proposed was to quickly open a multi-beneficiary account for the parent company that, through an addendum, named the specific, acquired entities receiving payments as beneficiaries.
- That allows funds that would have gone to the SVB accounts to instead go directly to the parent’s account at its main bank. And because the parent company already has accounts with the bank, the KYC process took less time than opening a new account in the name of an acquired entity.
- Customers of acquired companies were told to make payments to the new account, which could accept payments for entities named in their contracts. And even if some customers persisted in making payments to the original entity, the multi-beneficiary account allowed the bank to accept the funds and place them in the parent’s new account.
- “Pay on behalf of structures have existed for a long time,” the treasurer said. “This is the same idea, just accept on behalf of.”
Broader M&A applications. The SVB crisis’ silver lining for this corporate is the opportunity to apply the multi-beneficiary solution broadly as it does more M&A deals. “If we have an acquisition and want to move quickly, then we can use this going forward,” explained the treasury team member who worked with the bank to open the new account.
- He sees the potential for significant time savings in closing legacy accounts that formerly needed to remain open to accept payments because acquired entities are named in contracts that take time to change.
- “A lot of times, we want to close the other accounts but treasury has no control because the contracts are out there for one or two years unless sales and legal move quickly to change them,” he noted.
- In the future, all legacy accounts will be channeled into the multi-beneficiary account, simply by adding the acquired entities to the list of beneficiaries via an addendum.
Overcoming the tax obstacle. In the past, this company opened new accounts for each entity of an acquired company before the legacy account was closed, a process that could take years, potentially resulting in an inefficient proliferation of bank accounts.
- For many corporates, a hurdle to using a multi-beneficiary account has been resistance from the tax department. But given the SVB situation, treasury at this company was able to move forward quickly. “Tax was pushed off because of the urgency,” the treasurer said. “We basically told tax to figure it out. We needed to get a handle on the financial crisis.”
- In addition to working closely with tax and legal teams, the member who opened the multi-beneficiary account recommends peers reach out and talk to their banks and find out if they offer the solution. His company’s good relationship with its large banks facilitated the process of opening the account and starting to use it, he said.
Will virtual accounts also solve the problem? Another member of the tech treasury group is considering using virtual accounts to confront the legacy account conundrum. NeuGroup Insights will explore that idea in a future post. But here’s the basic idea, according to the member:
- “The concept is to move banking from the target’s bank (SVB, for example) to a virtual account with our banking partner before integration,” he said. “The focus is on virtual accounts because of their flexibility to manage during and post-integration. This is not a formula for all acquisitions, but there are advantages” for smaller, acquired companies, which tend to bank with regional and small financial institutions.