Across all the deals we’ve done, there is likely no larger deterrent to both a premium valuation and a smooth closing than a company that doesn’t have clean financials. We certainly can be empathetic for companies that have not prioritized financial reporting, particularly for an entrepreneur of a young, fast growing company whose time is filled with day to day operational tasks and decision-making. For growth companies running at full speed, maintaining accurate and up to date financial statements can easily slip to the bottom of the task list. While it is a common mistake, losing your grip on financial matters can lead to problems both operationally and when pursuing an investment or sale. Poor financial reporting will hinder your ability to make informed decisions on managing and growing your company, and it will destroy buyer/investor trust and confidence in your potential as an investment.
Are your financials in order?
Financial reporting may be a problem for your company if you have any of the following issues:
- You do not have up to date monthly financial statements readily available – You do not track financials monthly and/or you are several months behind in reporting. Strong financial departments often produce monthly financials by the 10th of the following month. Closing later in the month reduces the usefulness of financial reporting.
- You are not able to track revenue with expenses – You are not sure if your expenses are generating sufficient revenue to achieve profitability goals. Properly recognizing revenues and expenses in the month they are earned (known as accrual accounting) gives a better picture of profitability than cash-based financial reporting. Cash based financials can hamper management’s ability to make decisions.
- Your financial statements are difficult to follow – Someone outside of your accounting team cannot easily understand your business model and financial position from looking at your financials. Clean reporting is organized by business unit or division and is consistent over time. Instead of making users scratch their heads, clean reporting enables high-value conversations around the business.
- Your financial team does not have clearly defined processes – Lacking a standard set of procedures, such as bank account reconciliations and a monthly budget meeting, your financial reporting may contain significant errors. A written set of financial controls creates peace of mind.
Without clean financials, prospective buyers/investors cannot conduct the level of financial analysis required to determine whether or not they want to move forward with an opportunity. If you are unable to provide monthly financials, buyers may be forced to pass or delay a decision. Without confidence in the accuracy of these financials, interested buyers often have no other recourse other than to hedge their offers downward to compensate for the risk of the unclear and inaccurate financials. The timing of closing a transaction will also be impacted, as significant effort must be exerted in the diligence phase to validate the accuracy (or get as close as possible) of the unkempt numbers. Additionally, running significant personal expenses through a business can further complicate matters, as buyers want to understand solely the costs to operate a business. The more of these non-business related expenses that flow through the P&L, the less credit a buyer will be willing to give to the seller for each addback.
For business owners who are looking to maximize their valuation and minimize the stress and headaches of financial due diligence, we advise being sure you can answer yes to the following four questions:
- Do I have Audited and GAAP compliant (or at minimum prepared and organized per industry standards) financials?
- Are monthly income statements, balance sheets, and cash flow statements are readily available?
- Does my company regularly update and track performance against a Budget/Forecast?
- Have I established monthly financial Key Performance Indicators that are used to track and evaluate performance?
If you can answer yes to all, breathe easy as you have positioned yourself well. If your answer to any of the questions were no, our Strategic Advisory Practice, headed by Mike McCraw, can help understand your current operations and set you on a path to success.
About Founders Investment Banking
Founders Investment Banking (Founders) is a merger, acquisition & strategic advisory firm serving middle-market companies. Founders’ focus is on oil and gas, SaaS/software, industrials, internet, digital media and industrial technology companies located nationwide, as well as companies based in the Southeast across a variety of industries. Founders’ skilled professionals, proven expertise and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M & A Securities Group, Inc. or Founders M&A Advisory, LLC, both members of member FINRA & SiPC. M&A Securities Group and Founders are unaffiliated entities. Founders M&A Advisory is a wholly-owned subsidiary of Founders. For more information, visit www.foundersib.com.