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We look at the key areas for consideration as business leaders prepare their companies for investment.
In brief
- The disruption caused by the pandemic has meant that investors are more particular than ever. Thorough preparation has never been more vital
- EY’s Richard Goold shares his insights on how to lay the foundations for a successful investment process, and the common pitfalls to avoid
The investment market for mid-sized, scale-up businesses is accelerating. Market activity increased around September 2020 and has continued to pick up pace, especially in the technology sector. But the disruption of the last year has made investors more discerning and it has become more important than ever to be properly prepared when setting out to look for investment.
Many of the senior executives we speak to are surprised to hear that preparing a mid-market company for a first round of investment is likely to take 12 to 18 months. It can be tempting to fall into the trap of seeking to minimise the timetable; however, our experience demonstrates focused preparation can lead to a higher return.
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By GlobalDataRead on to hear Richard’s advice about the fundamental areas to consider when preparing your business to attract investment, including where he’s seen things go wrong, how to run an effective ‘health check’, the role of the finance function and data, and the importance of coordinating the financial and legal aspects of the business.
Where we have seen it go wrong
As a business leader, it can be challenging to put yourself in the shoes of the investor and to see things from their side of the table. More often than not we see a David and Goliath scenario, with the resources and manpower of the investor side dwarfing that of the business. In that respect it can be immensely helpful to get an external view, and to develop an understanding of how an investor will interpret your business plan.
The issues that we see causing problems most frequently in investment readiness relate to:
- Overly optimistic forecasts that are not supported by track record to date
- Trading updates that do not support the growth story
- Management not consistently aligned behind the plan
- Performing diligence too late – meaning there is inadequate time to deal with issues
- Failure to understand the level of detail required by investors
- Management view, management information and the data room telling different stories
- Incorrect or unreliable data correlating to leakage in business value
There are several steps that businesses can take to avoid these common pitfalls. The first is to run a ‘health check’.
Run an effective ‘health check’ to assess readiness
Running a ‘health check’ involves a review of key financial, legal, operational and commercial issues that will affect the deal structure, the investment process and, crucially, business value. Holding a management round table to align thinking from the outset can be a helpful start, along with conducting detailed analysis of key business areas:
- Business structure
- Governance
- Financial reporting and forecasting
- Operations
- Commercial
- Tax and legal
- Technology and IT
- HR and performance management
The ‘health check’ is also an ideal time to identify a core set of financial and operational KPIs for continued review. This allows time to factor in any operational changes, additional capabilities or technology, needed to produce this critical data.
The finance function and the role of data
Granularity, transparency and consistency are essential.
Many people fall into the trap of thinking that data analytics is about selecting the right tools and platforms. Dashboard and visualisations are unquestionably important to help drive adoption of business intelligence and to tell stories with data. However, they are the easy bit. The route to success in finance is to build a layer of trusted data which can be used for reporting and analytics.
Key questions to ask are, how will this data be assessed, how will it be accessed, and how therefore how do we need to organise it?
No one runs a business with textbook operational processes, they run it in the real world, but if you want a business that’s transaction ready, then it’s best to think from the ground up about how to organise your finance processes to achieve robust data and reliable reporting. When drilling down from forecasting does your data room support the forecast? No matter which entry point an investor might pick to interrogate your reporting, will the numbers tell the same story throughout?
As part of any remediation work it can help to be clear on how day-to-day finance operations need to be structured in a way that can deliver reliable, consistent data. Embedding these processes can take time and requires a finance team that are consistently switched on to being ‘data aware’.
Coordinating the financial and legal aspects of the business
The body of law relating to how a company is run and how its finances are organised is constantly evolving. The challenge is to stay on top of the legislation and then understand how it should be applied to an individual business. Only then can the investment process be started with surety. The range of legal responsibilities and issues is extensive; broadly they include:
- Corporate – capital, shareholders, joint ventures, business structure
- Intellectual Property (IP) and IT – IP registration, hosting, ownership
- Data protection – Privacy, Personal Information management, cyber security
- Finance – facilities, covenants, loans
- Commercial contract – customers and suppliers, terms and terminations, liabilities
- Employment and benefits – contracts, pensions, incentives
- Operations and other – environmental, property, insurance, litigation
In our experience the first three bullet points relate to the areas that most frequently come under challenge from investors. It therefore pays to dedicate sufficient time and focus to provide suitable clarity and completeness in these particular areas.
The four fundamental steps for an investor preparation strategy
When beginning to think through your investor preparation strategy the following four steps can be a helpful place to start:
- Carry out remedial work: perform the diligence identified to anticipate and resolve any issues an investor will be concerned with
- Get data room ready: gather all the data, reporting and other necessary information and present it in a clear and structured way that will meet the investor expectations
- Test potential deal structures: identify any factors that will inform the best deal structure for shareholders
- Execute consistently: work through the process with a strong equity story supported by solid data
Whether you are working through a preparation strategy for investment, or are further along the diligence process, EY can provide a suite of services, that can support your enterprise and help to increase investor confidence.
To find out how EY Finance Operations can help you adapt, stay agile and access timely and accurate management information, book a time to speak with one of our team.
Summary
Investors are eyeing mid-sized, scale-up businesses, but the economic effects of the pandemic have made them more selective, with increased competition for high-quality opportunities. Allowing enough time to ensure you have your business investment ready has never been more important.
