Two baby boomer shareholders of a specialist service related business got themselves into a tight cash flow spot last year and their accountant was unable to provide the depth of analysis and modeling of cash flow to understand and take control of the problem. Their problem was resolved using SMEtric’s cash flow management services which highlighted the problems and the solutions. At that time it was identified that as well as ongoing CFO services, the business could do with the services of an Advisory Board to plan an eventual exit of the business to enable the owners to retire as they were very much working in the business, not on it and there was no form of financial governance for a business of a combined $15m turnover and some $10m of debt. They chose not to.
The owners had had approaches in prior years from parties interested in purchasing the business. However, discussions never progressed due to a lack of availability of financial information and an unrealistic view of the value of the business.
A year on, an opportunity arose for some consolidation in the overall industry as two other players were under financial distress and there was too much capacity in the market. Both businesses suffered similar issues to the other business with too little time spent working on the business and a complete lack of financial governance with no regular performance reporting or financial forecasting.
The owner sought advice from a lawyer and SMEtric for an amalgamation of the three businesses which would result in reducing the excess capacity in the market, operational saving by moving to one location, staff savings on the management and administration of the business and sale of surplus equipment.
Due diligence and investigations were undertaken by SMEtric over a period of 3 months to determine the best structure operationally, financing and also equity input.
Unfortunately, the opportunity to build a stronger business was missed due to a number of factors that would have been identified earlier if all three businesses had up-to-date financial information and forward view of their business.
A number of problems were found during due diligence: the historical earnings of two of the businesses did not reflect the actual position due to treatment of repairs and maintenance costs and other accounting treatments that had been done to reduce tax; there were no forecasts of future financial performance and projects in the pipeline; the operations were too dependent on the present owners; the profits generated from two of the businesses were far too low for the value of their assets making them unattractive for future investors.
The owners now have a better understanding of their business and the factors that influence business value and readiness for sale. They are now focused on getting professional advice to ensure that their business is ready for sale in 3 years’ time.