Your most valuable asset…. Don’t just roll the dice!

When you are looking to sell your business, or raise money to fund growth or a management buyout, you are opening your company up to the scrutiny of third parties.  That might be a buyer, or a bank, or a private equity investor, but in all cases, they are looking to properly understand your company and how it works.

Statutory accounts can give buyers a good snapshot with some quality checks, as they have usually been prepared by a recognised accounting firm.  If you are a larger company and have actually been through an audit process, then that’s even better, as a higher quality threshold should have been reached.  But they leave so many questions unanswered…

• They are usually for the last financial year, so are already out of date;
• They provide only an annual snapshop so give no insight into seasonality;
• They can easily be impacted by end of the year cut-offs;
• They do not give any insight into trends, be they growth or decline;
• They provide limited granularity as to the true drivers of the business.

So inevitably investors, lender or buyers ask for more, and typically the basic list looks something like:

• Monthly management accounts or trial balances showing both Profit & Loss and Balance sheet data to properly understand the seasonality and trends;
• Client level data, be that revenue or invoices to understand what is driving revenue – new client wins or losses, price increases or new products, as well as to understand concentration risk;
• Supplier level data, especially for manufacturing business to understand concentration risk and pricing changes;
• Payroll and headcount data to assess operational efficiency, as well as recruitment and churn issues;
• Financial forecasts so they can understand where you feel the opportunities for growth are.

We know that often SMEs have never looked at their business in this much detail.  And they get a little exasperated when asked for this information … “We are a simple business, do you really need all this?” The answer is always an emphatic yes.

Detailed analysis often highlights important trends, for example:

• You discover that your client churn is significantly higher than you realised. You have lots of small clients so no single one appeared on your radar, but if you keep leaking clients off the bottom, it makes it that much harder to grow.
• You find that your revenue per employee has been heading in the wrong direction over the last couple of years. Why is that?  Is it a trend, or can it be reversed?
• Your business is very project based, and you don’t properly account for work in progress each month; this makes your profit very variable month to month, and therefore impossible to secure the level of bank lending you were looking for.

So rather than wait for a buyer or lender to find out these things about your business, it is much better to do the work in advance and be ready.  None of these things are terminal for a deal, but isn’t it better to be prepared for discussions on these issues and, if possible, have an answer or solution?

A good corporate finance advisor will always work with their clients to prepare this information in advance of any potential transaction.  I would actually go as far as to say, you can’t properly present any business for sale without going through this thorough process, to properly understand and explain the business economics.

And that applies even more during this period impacted by Covid-19.  How has the business fared?  And how is the future looking?  A lot more weight will be put on financials for the next year if this year has been impacted by Covid.  So putting together a well thought out, detailed, realistic budget will be a critical part of any successful transaction – and you’ll need to demonstrate that you are hitting that budget during the months of the sale or investment process.

No businesses are perfect, especially SMEs.  But being told something you didn’t know, or that is a surprise puts you on the back foot.  By being prepared, armed and knowledgeable about what investors and buyers are looking for keeps you in control.

So before you consider any kind of transaction, do your preparation.  Get an advisor that can work with you and who understands what is going to be required, who can ask the difficult questions and get you ready.  Don’t be defensive…. Your advisor is on your side and will help you craft the answers, for when the tough questions come from the other side.

As a client once said to us….. you only get to sell your family business once.  So don’t just roll the dice…. Make sure you prepare and get the outcome you and your fellow shareholders deserve.