A potential investor has asked for financial information in order to complete due diligence.
The business is performing well, but our account keeping is in a bit of a mess. What can we do to present our financials in a good light?
What do investors look for/need?
This week’s Secret Soloist is answered by business advisory specialist Paul Clements.
Given that your accounts are in a bit of a state, it may certainly be a red flag for anyone performing due diligence as to the fair presentation of the financial information.
The reliability of the business financials would certainly be improved if the accounts have been subject to an audit or at least reviewed by a reputable external accountant.
Either way, I would recommend compiling a set of working papers to substantiate the balances that are shown on the business’s balance sheet and key profit and loss items such as wages, stock, leave provisions, bad and doubtful debts, consulting fees, etc.
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The working papers and reconciliations will provide evidence to substantiate that the business’ bottom line is a fair reflection of its operations.
Where an investor is looking to buy the shares in a business and not just the business, there is the risk of taking on the “skeletons in the closet”, i.e. unknown commitments, liabilities and warranties.
It is recommended that you prepare a schedule of all commitment and operating leases that the company has entered into which would expose the new owner to a liability.
For example, rental agreements, mobile phone contracts and photocopier lease agreements.
By doing the above, it certainly goes a long way in indicating to the person performing the due diligence and the potential investor that you have nothing to hide; and that the financial statements are in fact a fair representation of the business position and performance.
You can of course go further and provide a due diligence folder with background information on the business, its history, market, key challenges, etc, along with key documentation that the investor is likely to need in order to make an informed decision in regard to investing.
That documentation will depend on the type of business and could include schedules such as listings of plant and equipment and other assets, liabilities, stock, employee entitlements, employee listing with positions and responsibilities, debtors and creditors aged listing, copies of leases and key contracts, copy of Tax Office running balance account to show status of lodgements of BAS and tax returns and any outstanding tax owed and a list of any patents or trademarks held.
Of course, prior to allowing the investor to undertake their due diligence it is wise to have a signed confidentiality agreement, which is subject to the due diligence but which sets out the terms of the investment arrangement.
Without this, you may be undertaking all the above work only for the deal to fall over because key terms have not been agreed.