Ownership changes and the customer file: close it out or cover it up?(credit column)(Column)

In the current age of mergers and acquisitions, the name of a customer's business, which at an earlier time might have been a fairly permanent indicator of the specific business entity, has become much more susceptible to change. Companies are continually bought and sold and assumed into other companies, and while the mega-mergers are broadly covered by popular news outlets, other sales might not be as publicized. When this is the case, it's often up to the vendor to find out what their customer wants to be called or, ideally, stipulate in the contract that the customer will inform the seller of any name change when it happens.

But once that new name is known, it's important to document the change correctly. The best practice in this instance, from a credit standpoint, would be to close out the old owner's account and start a new one for the latest owner. Yet, this practice may not readily occur to all members of a company's staff. Case in point: Connie Weiland, CICP, credit manager at Land O' Lakes Purina Feed LLC in Wisconsin. Weiland noted that in her department, when a customer's business is sold, the account is closed and a new account is opened with the customer's new name and a new account number. However, Weiland has encountered issues with other staff who, when they learn that a customer is no longer known by the name on their account or that the customer's business has come under new ownership, will use the same account number and simply change the required information in the system. "If, in a year from now, some would call to get history on the previous owner, our system would not have a record of that name," said Weiland. "Once we change the name in our system, the old name is gone."

For Weiland, this is a difficult pill to swallow. "I have a strong banking background,' she said. "The banking structure always had strict instructions regarding when a new owner took over an existing business. If they kept the same name or changed the name, we always had to close out the existing account and set up a new account."

"This was due to [Internal Revenue Service] reasons, interest reporting under federal tax identification numbers or social security numbers and so on," she said. "Closing out one account and starting a new account gave us accurate records regarding when one business closed and when we started doing business with the new entity."

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As Weiland noted, making name changes without closing the account and creating an entirely new file erases the line between the customer before and the customer after changing ownership or changing names. The new entity's performance is automatically and almost inextricably linked to that of the old entity. If a poorly performing customer gets assumed into another larger business and comes under new management, a quick look at their history could lead a credit manager to offer a very conservative, limited line of credit, when, in reality, they should be treated like a new customer and scarcely judged for the performance of a former manager. This could lead to an unnecessarily negative start to the new business relationship and lead to a loss of potential revenue.

Not creating a separate new account when ownership changes for good customers can also negatively affect a company's potential finances. Weiland's business is predominantly in feed sales and her company distributes to Purina and Land O' Lakes dealers who then sell the goods out to customers. "We track monthly feed sales by tons and dollars," she said. "We have incentive programs to reward Purina and Land O' Lakes dealers when a certain growth in sales has been reached."