Is your business looking to get acquired by a private equity firm? It’s an exciting but harrowing process as you try to impress investors and make yourself look suitable for private equity acquisition.
The competition is fierce, and after years of runaway PE acquisition, there are signs that the good times might be at the point of scaling back. Analytics firm Preqin conducted a recent survey in which 62% of fund managers and 61% of investors feel that private equity has hit the peak of its bull cycle. With COVID-19 having taken its toll on every business, it’s imperative
to make yourself as attractive to equity investment as possible.
Today we’ll be talking about one of the biggest pet peeves of PE Firms when it comes to their acquisition targets – poor in-house finance teams and accounting problems. No private equity fund wants to spend more time and effort than necessary to optimize your backend processes, so you’ll be all the more attractive if you already have your ducks in a row.
Why Accounting Problems Are The Biggest PE Pet Peeve
When conducting due diligence, nothing is worse for a PE firm than finding out that a finance department has been dropping the ball. So much so that it is often a major sticking point during acquisition talks. PE firms ultimately view this as a sign that there are likely major flaws in your financial data and checks and balances that have contributed to financial woes.
If your financial team has left your information incomplete, incorrect, or presented in a confusing manner, it turns into a massive headache for the PE firm looking into you. Even if you aren’t looking to be acquired, bad financial management can mean you’re losing money and not even noticing it.
With this in mind, here are some of the most common accounting and bookkeeping errors businesses make, so you can avoid them – and keep your potential investors happy.
This is one of the most basic and easiest mistakes to make, making it all the more maddening when it’s discovered. Accounting mistakes can arise from insisting on doing your books by hand and forsaking accounting software – which doesn’t make you charmingly quaint, it makes you a nightmare for anyone trying to parse your financials.
Sometimes the issue is in the data itself. Data that isn’t properly updated is just as bad for bookkeeping as data that is incorrectly entered. Accounting errors don’t just turn off PE firms – they can actually make you more vulnerable to bad actors and fraud.
Cash Flow Management Mistakes
We understand that for a young business cash flow management can be one of the hardest things to wrap your head around. But isn’t the reason you’re looking for an investor to help with that cash flow?
The thing is, any good PE firm is going to want to see that you understand how to properly handle cash flow. Common mistakes with cash flow can include mistaking revenue for profit, over-borrowing, and failing to keep cash on hand. Another irritating administrative problem is not keeping on top of invoicing. It’s not a good look if you can’t keep your receivables coming in on time.
Mixing Personal and Business Accounts
You’d be surprised how much this one comes up, but not so surprised at the frustration it induces when trying to perform due diligence. It is essential that you keep separate books, bank accounts, and credit cards for personal and business spending. If you don’t, it becomes impossible to tell what is deductible or not, and which investments are actually generating profit. It can be incredibly difficult to disentangle the two if they’ve spent a long time being mixed together.
Unreasonable Budget Assumptions
Part of the acquisition process is trying to make yourself attractive to private equity firms. That’s understandable. Making budget assumptions is also understandable – having some financial foresight is a part of any business. However, any budget assumptions need to be reasonable and come from a place of reality.
You need to be able to back up any budget assumption you make with benchmarking and past experience. Otherwise, it’s up to the private equity firm to find out what a more reasonable set of numbers will look like, extra work they won’t be happy with.
Need Expert Help Getting Your Finances in Order?
It is always preferable to have an expert in your corner when you’re looking to optimize your finances. Many young businesses looking to get acquired bring in part-time financial support and consultants to ensure they’re in a prime position to be attractive to private equity investment.
Greenough Group’s accounting services are highly sought by both small businesses and rapid-growth tech startups alike. Their involvement in your business is scalable to remain cost-effective, and their hourly commitment can grow alongside your business.
GCG is the preferred accounting services for startups firm of executive Tom Rowley, who has utilized GCG’s services in several of his ventures: “I’ve brought GCG into my last four startups. Getting finance running smoothly, as quickly as possible, allows me to focus on building the business. Hiring GCG is one of the first things I do.”
Our reputation for accuracy, senior attention, and exceptional client service has made us one of the financial community’s most highly recommended back-office services firms. Contact us today for a free consultation and learn how we can help you be more attractive to investors.