M&A Readiness: 4 Financial Processes to Put in Place Before You Seek a Buyer or Investor
Every dollar that flows in and out of your business tells a story.
Love it or hate it, cash flow is king in the world of mergers and acquisitions (M&A). That’s true whether you’re looking to exit your business entirely or simply seeking to ‘spread the wealth’ across new investors.
Regardless of your objective, one thing is certain: Finances are the first thing any buyer or investor will want to know about your business.
Why? Because, again, finances tell a story. And if you want to attract the right kind of capital, you need the financial processes in place to articulate that story.
So what does that mean in the context of your business?
Due Diligence: The First and Final Hurdle
First, a primer on perhaps the biggest M&A procedure: due diligence.
Historically, due diligence emerged as a clause to protect brokers from prosecution if they accidentally failed to reveal facts about their business.
Essentially, it’s legalese for “Hey, if you wanna buy into our company, you need to do your homework on it. We’ll give you as much info as we can, but if something slips by, that’s on you (the buyer), not us (the seller).”
Fascinating, huh? But as you might imagine, this carries major implications:
- Buyers and investors have every incentive to poke and prod to ensure they’ve done their due diligence.
- Sellers and investment-seekers need to make the process as easy as possible—or risk capital floating to the next guy.
So with all that in mind, here are the four main things you can do to prepare.
#1. Assemble a 3-Year Financial Report
Three years might feel like an eternity in entrepreneur time. But for acquirers and investors, it’s a clear line in the sand.
Why so?
Financial data over three years old is sometimes deemed “legacy” info—useful for context, but not indicative of the company’s current financial health. Conversely, less than three years of data often leaves too little information to be considered actionable.
So to meet buyer and investor expectations, prepare at least three years of financial statements, including:
- Income statements (P&L)
- Balance sheets
- Cash flow statements
- Accounts receivable and accounts payable (AR/AP) aging reports
You’ll also want these records externally audited by a credentialed accounting service. “Trust me” doesn’t fly far when we’re talking multimillion-dollar deals.
#2. Quantify Key KPIs
Key performance indicators (KPIs) are your ticket to building a convincing due diligence package.
That said, the question of which KPIs to focus on depends on your business. For example:
- SaaS companies operate in a way that revenue doesn’t matter; growth and retention metrics do. This includes customer acquisition costs, customer lifetime value, and churn rate.
- Growth-stage businesses are the opposite—it’s all about EBITDA. Even if your customer base is growing, investors may be hesitant to buy in if your bottom line isn’t healthy. Prioritize metrics that demonstrate scalability, such as EBITDA growth and revenue diversification.
- Startups will want to demonstrate efficient use of funds—that you can stretch every dollar for maximum returns. KPIs like burn rate, cash runway, and conversion rates can articulate this tale well, demonstrating viability.
Since there are literally limitless KPIs you could focus on, the goal is to hone in on what your ideal acquirer or investor would be most interested in. So keep a dashboard of 5–10 KPIs tailored to your ideal investor handy.
#3. Build a Budget, and Forecast for it
Every buyer wishes they could ‘skip to the end of the story’ and see whether their investment turns out successful.
So why not help them do exactly that?
With a solid foundation of financial metrics (you’re collecting them anyway, right?) you can recast those numbers into:
- Future-focused, strategic data and growth projections
- Scenario-based outcomes, such as best case, base case, and worst case
- Forward-looking budgeting and spending schedules
When grounded in realistic assumptions, industry trends, and real financial data, these projections might just be the tipping point for an investor to pull the trigger.
(As a side note, this sort of strategic work is something our fractional CFO service specializes in.)
#4. Remember the Human Element
It’s easy to get so busy selling yourself that you lose track of the bigger picture.
But remember this: An acquirer or investor is your equal, not your superior. You also want to see whether they are a good fit for your company.
That boils down to a three-step check consisting of:
- The litmus test – What’s a quick and easy way to filter your prospective buyers or investors? For me, it’s whether I can imagine myself having a beer with their leadership team. (No, seriously. If we’re entangled with someone for a years-long M&A deal, you better be damn sure I like them enough to sit down for a beer.)
- Values and vision – How does your potential patron feel about your company’s mission? Besides bringing capital to the table, what can they add to your business to help achieve that mission? Culture is the most valuable currency to keep your old guard aligned amidst new changes.
- The “dirty details” – Structure, governance, and strategy are all topics that merit discussion between you, your team, and the potential acquirer/investor. This includes transparency on what will change, what will stay the same, and most importantly, how that will affect the people at the heart of your business.
I cannot stress those last two points enough.
Amidst all the pressure of prepping for due diligence, you can’t afford to forget the people scripting your story.
For Ultimate M&A Readiness, Find a Fractional CFO
To be completely honest… We barely scratched the surface of what you’ll need for serious due diligence. The level of scrutiny can be, in a word, insane.
Even with established processes for reporting, quantifying, and budgeting your finances, potential buyers will no doubt dig much deeper. What that entails depends on your business, sector, and so many other uniquely “you” factors.
So if you want to build an ironclad due diligence prep plan, you’ll need more than vague checklists and generic internet advice.
You’ll need expertise. People who care about your finances. People who know what your buyers want to see.
And for that? I highly recommend a fractional CFO.
Quadrant Advisory specializes in this service. Along with our certified controllers and accountants, Quadrant’s fractional CFOs act as a strategic catalyst to shore up your finances—for acquisition, investment, or any other growth phase.
When you’re ready to get started, book a call with me. Let’s tell the world your story.
Sources:
Forbes. Understanding KPIs and Their Importance in Your Business. https://www.forbes.com/sites/melissahouston/2023/10/20/understanding-kpis-and-their-importance-in-your-business/
Harvard Business Review. KPIs Aren’t Just About Assessing Past Performance. https://hbr.org/2021/09/kpis-arent-just-about-assessing-past-performance