The importance of management information when financing growth or selling your business

When you are selling your business, one important area which is often underestimated is undoubtedly the financial due diligence (FDD) exercise. FDD involves the prospective buyer analysing the financial data of the company for the last say 3-5 years.

It can be shorter than this, but the important point is that your company’s recent financial performance will be subjected to substantial scrutiny and is an area that can provide the buyer with an opportunities to reduce the agreed price.  To provide appropriate levels of comfort to a buyer and to avoid a price chip the business should have high-quality financial information, in particular, very high-quality Management Information.

What qualifies as high-quality Management Information (MI)?  The MI must be relevant, easy to read, accurate, timely, consistent and well managed.  The following is what you need to think about:

  • Relevant & easy to read – The content of your MI needs to add value to the business and that means containing KPI’s (key performance indicators) that help the reader understand what is driving the bottom line.  This might be an analysis of sales, margin, wages, projects, and overheads.  If the company has separate stock systems, for example, then the MI needs to reconcile back to reports from those systems. All high-performing businesses need to understand their historical position as well as their budgets/forecasts, to ensure that have a good 360-degree view of the trading and financial position of the business.  This might also include things like stock, debtors, creditors and cash flow analysis.
  • Accurate – If there are mistakes in the accounts, there is an automatic loss of credibility, and the buyer may use the matter to adjust the agreed price.  The MI needs to be free of errors and should also highlight areas of concern, perhaps via some kind of ‘Highlights Memorandum’ that helps the reader understand issues faced by the finance team and how those issues have been resolved.
  • Consistent – When the buyer views current MI alongside MI from say 3 years ago, it helps if the layout and the KPI’s are similar, which helps the buyer identify the direction of travel of the business.  It is essential to achieve a high degree of consistency in MI.  Lack of consistency may lead to incorrect assumptions on the buyer’s part, and this may lead to further price negotiations.
  • Timely – Good quality MI needs to be available quickly after the month-end and if it is obvious that prior months’ MI has been sporadic and late then the buyer will quickly lose confidence in the quality of the MI.  This problem is doubled if up-to-date MI is not available during the FDD process.
  • Well managed – This can mean several things, including having a well-managed finance team but also a well-managed ‘feedback loop’, whereby improvements to the MI are an ongoing process.  For example, a regular monthly board meeting should have decisions taken that help improve the quality of the MI and those decisions need to be regularly fed back to the finance team - the required changes will ensure ongoing enhancement to reporting.  This process will also assist with the investigation of problems identified at the board meetings.

If you have read the above points and you are happy that your business has high-quality MI, then you will absolutely reduce the chances of price chip on the sale of your company.  The bottom line is you need to be able to impress the buyer with the high quality of your reports such that they do not question the MI when assessing the quality of the business.  If you are not happy with the above points, then maybe your finance team needs help.

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If you have any questions regarding the above, please get in touch with us using the form or contact Keith Marshall below. 

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