The finance engine
How your business’s finance function could make or break your exit
When you start the conversation about selling your business, attention is inevitably focused on the main drivers of value: factors such as profitability, market positioning, USPs, growth expectations, and quality of management.
But the importance of your finance function, which often operates quietly behind the scenes, can be overlooked. That can be costly when it comes to your exit. The finance function has a critical role to play in maximising value, and can even determine whether a deal gets done at all.
We would encourage you to get in touch with us well before an exit process begins. We can help to review your finance capabilities, and assess how they could be refined as you position the business for a successful transaction.
Beyond the back office
In many businesses, the finance function is not prioritised, particularly during periods of growth. Management focus gravitates towards sales expansion, recruitment in other departments, and operational challenges. Unless the finance team evolves with the size and complexity of the business, it can become wrongly perceived as a purely administrative function.
In short, if you think finance is the same thing as accounting, you might need to shift your perspective. Routine accounting tasks like bookkeeping, invoicing, payroll and tax compliance are clearly essential to the smooth running of a business. But they are only the foundation of what a finance team can potentially deliver.
Given the necessary resources, the finance team could be providing data, analysis and insights that allow other departments to understand what is happening in the business and make informed strategic decisions about everything from product pricing to capital expenditure.
These capabilities can have an immediate beneficial impact on your business, which could improve its financial position over time and therefore increase its value. And when it comes to an exit, your business will also be more capable of meeting the analytical demands of potential acquirors.
Strong finance underpins value
Any acquiror will base their investment decision on information that flows directly from your finance team. Coherent and well-presented financial data, delivered promptly, helps to build the buyer’s confidence in the value of your business.
Many companies do not routinely produce the building blocks of financial information that an acquiror would hope to review: monthly management accounts (including P&L, Balance Sheet and Cash Flow Statement), a budget for the next financial year, and a forecast for beyond that. This does not make a business unsellable. But it does create friction in the sale process, making the business harder to sell and potentially reducing value.
The due diligence process can also place huge demands on a company’s finance team, which are easier to handle if the team has the right skills and resources. Being able to quickly supply data and reports will make the transaction less painful and allow the finance team to keep up with their business-as-usual responsibilities. This operational continuity can be crucial to maintaining business performance, during what is always a lengthy and demanding process.
The hidden costs of a ‘lean’ finance team
Some business owners deliberately run a minimal finance function with no finance director or CFO, as part of efforts to maximise short-term profitability. But this can be a false economy when it comes to an exit.
If a buyer believes your business needs financial leadership, they could take the view that your profits are artificially inflated. Imagine you are selling your business at a valuation based on 5x EBITDA, and the market rate for a finance director in your type of business is £100k. If the buyer adjusts their view of profitability due to the lack of a finance director, this could lead to a £500k reduction in the value of your business.
Practical alternatives to full-time financial leadership
Of course, it is also true that hiring a full-time finance director or CFO is not the right decision for every business. Smaller companies might want to consider alternative ways of strengthening their finance capabilities and exit prospects.
Fractional CFO and finance outsourcing services offer access to senior financial resources for an agreed number of days per month, or as needed. These arrangements can include strategic financial guidance, improved management reporting, budgeting and forecasting support.
One big advantage of this approach is flexibility. You can scale the support with the needs of the business. This could include getting extra help when it comes to meeting the demands of an exit transaction process.
Acting sooner rather than later
The most successful business exits typically involve several years of preparation, and addressing any issues in the finance function should begin early in this process.
You need to consider both current capabilities and future needs. Ask whether your financial information would inspire confidence in a sophisticated buyer, whether your team could effectively support a due diligence process, and whether your financial reporting tells a compelling story about your business’s performance and prospects.
If you’re concerned about your finance function or want to understand how potential buyers might perceive your financial information, the time to address these issues is now. Early action provides the greatest opportunity to strengthen your business value and optimise your eventual exit outcome.
