Maybe you’re flat out nurturing your young business through the early stages of growth. Or you’re an entrepreneur with a laser focus on product instead of your soon-to-be company’s structure. Either way, if attracting eventual investment or selling the business on figures prominently in your plans it’s time to stop working in your business and start working on your business long enough to build a financial reporting foundation that will make your company stand out to buyers and investors.
Private equity investments help investors diversify portfolios and tap into the potential of private companies like yours. To be a viable VC or angel investment target, your financials have to withstand the savvy investor’s sniff test. Knowing the key metrics private equity investors look for when they review a target company’s finances is critical to the way you structure your financial statements today for investment or buyout down the road.
What do investors or buyers want to see?
Forbes Business Council stresses the importance of data collection and analysis for measuring your company’s performance and poses the critical question, “…with countless examples of business metrics, how do you know which ones are worth tracking?” Key performance indicators (KPIs) cover the gamut of how your company runs from the way you treat employees to customer acquisition and retention, but today we’re focused on structuring your financial reporting to provide a clear picture of your company’s financial performance when it’s time to sell or attract capital.
VCs, for example, look for high returns and a clear exit opportunity. So one of your first priorities must be to prove your company is a.) growing and b.) capable of handling its financial obligations. You need to show proof your current assets are enough to cover short-term liabilities, stresses Entrepreneur. “Expect investors to evaluate your revenue streams, acquisition cost and turnover rates.”
How a company manages its money also says a lot about how it’ll weather market changes or unexpected events. That means future buyers and investors will want to know:
· Has the business been up or down in recently?
· How is it tracking with its competitors?
· Is it in a position to invest to drive growth?
· Does the balance sheet show enough current assets to cover current liabilities?
· What’s the company plan to repay debt?
With the right CPA, you’ll be positioned to provide the answers as easily and transparently as possible. Here’s how.
Build on the basics
Start with your financial statements. A company's core numbers let buyers and investors evaluate its worth and growth potential. Financial statements spotlight company health, throwing light onto its performance, operations, and cash flow. They provide essential information about a company's revenue, expenses, profitability, and debt. Financial statements also can signal red flags about financial instability or accounting anomalies.
Beyond the balance sheet
There’s no single indicator that can adequately assess a company's financial position and potential growth. Take a look at this summary of additional financials from Investopedia. The original article is targeted to public companies prepping for shareholder scrutiny, but the pillars are the same when you’re aiming to attract new capital or qualified buyers.
· Financial ratio analysis involves the evaluation of line items in financial statements to compare the results to previous periods and competitors.
· Profitability ratios are a group of financial metrics that show how well a company generates earnings compared to its associated expenses.
· Liquidity rations help show how well a company handles its cash flow and short-term debts without needing to raise capital from external sources,
· Solvency ratios indicate whether or not a company can manage its outstanding debt as well as the debt servicing costs.
Potential suitors calculate these metrics (along with many others) using the figures on a company’s financial statements.
The right partner can make you money.
By now, it’s pretty clear that the right financial reporting and analytics are your key to unlocking major capital down the road. So why don’t most CPAs offer more than basic accounting or tax services? We’re a profession that evolved from calculators and spreadsheets. Knowing how to set up and use data analytics to find actionable insights still isn’t a core skill for the average firm. Which makes it especially hard for small businesses and entrepreneurs to find a CPA partner who knows how to fast track them from growth to sale. Until now. At Market and Margin we believe the faster you place yourself in a position to make data-driven decisions, the faster your company will grow. Curious how we can partner with you to scale for growth and acquisition? Set up your free consultation here or call us today at 512-554-8707.