Written by Kristan King, Advisory Director at KPMG LLC
Working in KPMG’s Deal Advisory team for the last 15 years has allowed me to be constantly working with people who have been able to build businesses successful enough that another party has wanted to acquire some part or all of their business.
These successful enterprises are often driven by the ideas, spirit and determination of their founder or a small management team who relentlessly pursue a commercial objective of providing quality services or products in return for as much revenue or profit as possible.
Their submersion in their businesses means that these successful people are well aware of whether their business is going through a strong period or a slower period, for example, they will know if they have just secured a new large customer or lost one. But as businesses grow it can become much more difficult to track trends developing as a result of a combination of smaller factors.
Despite this inherent knowledge and experience, when it comes to seeking investment in their businesses, either for growth or as part of their eventual exit, it is often difficult for these people to communicate, particularly evidence in detail the reasons why their business has been successful.
An acquirer is inherently taking risks when investing as they don’t have this experience. They are external to the business, have relatively limited time to assess it and will often be allowing the person who built the business to reduce their role and so they become more dependent of the next level of management.
The realisation of value for an acquirer is at an unknown point in the future. The greater their perception of risk, the lower the value they are willing to pay, or the greater the proportion of consideration that is contingent upon future performance, and in many cases they may decide not to acquire the business at all.
Buyers will expect to see evidence of key decision making, quantification of the outcome of growth strategies employed by management and, as part of your monthly management accounts, analysis that considers trends in customer numbers, average spend, rate of recurrence, year on year pricing, rates of attrition and new business and so on. As most Isle of Man businesses are international, they will want to know which markets your customers are in and what is driving these particular markets.
And they won’t stop at revenue analysis; expect your cost base to receive similar interrogation.
The key fact is that buyers won’t accept just being told the story of the target’s development. You may not rigorously monitor all of these or other relevant metrics but a buyer will expect it and they may find that your business captures this data but doesn’t report it or use it. At this point, welcome to due diligence.
During a deal, it is almost never a pleasant experience for a vendor to be the subject of due diligence and to have everything they know about their business tested and challenged. It is particularly difficult compliance have taken a download of, say, your sales ledger data and cut it in ways you’ve never considered over multiple periods and identified trends that you hadn’t observed. However, it should be noted that such findings can be positive and once the pressure of the deal process itself has passed, vendors often remark that they themselves found the diligence findings insightful.
For those of you not contemplating selling your business, this brings me to the point. Reviewing the suite of management information that is reported to the Board or management team and challenging whether it gives you enough insight into the successful running of your business, or more importantly to optimise the success of your business, is a process that all management teams should consider from time to time.
Small changes to the data captured within your business and the implementation of often relatively simple analysis tools to gain insights from the data will add value right away and most certainly when you want to grow or sell your business. It will also save you time and perhaps give you peace of mind over some of those current unknowns that keep you awake at night!
The term Partner refers to a member of KPMG LLC / KPMG Audit LLC.
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