Investing in systems repays itself during business sale
The modern business plan is missing a crucial section, how the business owners are going to put a Technology strategy into play to maximize sales value
The sales cycle of a funded business currently ranges between 3-5 years for an investor to recoup their funds from initial investment. Traditionally the sale involves either an audit and IPO process, or due diligence. This robust process is designed to give a purchaser piece of mind over the business performance and projections.
Most startups in the last 5 years have started on Xero, and while perceived by many to be only for small businesses, it can support a HUGE number of trailing ‘OOO’s. As such, many successful low volume high value businesses are going to IPO or sale using the Xero platform.
A key differentiator in the value of a business is the forecast revenue of the business after sales, but the role of the purchasers due diligence team is to pull that forecast apart to lower the purchase price. So how does a technology strategy impact this?
It means that your assumptions are backed by data. Imagine the following three statements as footnotes to your CIM (Confidential Information Memorandum).
“The business has maintained a MRR churn rate of x (the rate of monthly recurring revenue customers leaving) over the last two years. Combined with the consistent growth rate of x, revenue is predicted to continue to grow to x.”
“The below graph indicates the prior two years of stock out incidents and also incidents where stock turnover time exceeds 60 days. A continued focus on logistics has decreased working capital requirements to y % which has been used for this model.”
“Over the last 3 years the projected profitability of projects delivered has been within +5/-5% of the initial project budgeted profitability. As such, all executed project contracts which have not yet commenced in the forecasts have been included without any variation or discounting of profitability from the individual project budgets.”
Previously this data was only available to customers moving into the ERP stages, from systems such as Netsuite or MYOB Advanced. Now, with integrated Xero systems, any business performance metric which is integrated into the general ledger can be measured over time.
A significant key to surviving and excelling through this process is through have a technology strategy and integrated systems early enough to demonstrate the crucial business metrics are being achieved over time, and that adequate controls are in place to give comfort to an auditor. Just having a system isn’t enough, as you need to have the robust policies and procedures to ensure the data in is being of a high enough quality to rely on.
“Successful acquirers view due diligence as much more than an exercise in verifying data. While they go through the numbers deeply and thoroughly, they also put the broader, strategic rationale for their acquisitions under the microscope. They look at the business case in its entirety, probing for strengths and weaknesses and searching for unreliable assumptions and other flaws in the logic.”
•https://hbr.org/2004/04/when-to-walk-away-from-a-deal - “when to walk away from a deal” Harvard business review –
•Geoffrey Cullinan
•Jean-Marc Le Roux
•Rolf-Magnus Weddigen
FROM THE APRIL 2004 ISSUE
So how do you balance the needs for systems and processes with the free-wheeling innovation of a new business? You plan for growth. Its fine to not have the answers to these problems, as you need to prove and succeed in your business before jumping into all the apps. Include in your business plan when you intend to find the answers to these questions.
Welcome to your business plan.
When (insert business name) reaches the first of one of below three milestones, the technology strategy plan will be implemented.
1. The business is cash flow positive
2.The volume of transactions is significant enough to require a bookkeeper
3.The business has significant customer traction of (predefined goal of x)
The technology plan will focus on the following areas
1. A gap analysis of the integrated business systems and finance function will be undertaken by an external consultant
2.An all in detailed systems design with testing will be undertaken
3.Implementation will be staggered over 12 months as follows
a.Implementation of systems for Account receivables/revenue generating processes
b.Review and updating of business growth strategy and budget
c.Implementation of management reporting systems and measurement of KPI’s in real time
d.Implementation of cash flow forecasting tools
e.Preparation and documentation of policies and procedures
f.Implementation of controls and value add systems
There are a couple of key things to note in the above strategy.
Don’t bother doing it too early, or too late. If you’re in due diligence, I can’t reconstruct the past in a meaningful and reliable way. It defeats the purpose. If it’s too early, then it’s likely your business model will shift and you will need completely different systems.
Firstly, to get someone external to your business to tell you where the weaknesses are. If you do it internally there are two risks. The first being, you don’t know what you don’t know. And secondly, there are people who specialize in designing best practice systems around Xero who will know what can be done better and why.
The plan needs to be developed for all areas at the same time. Do you think Jigsaw puzzle makers just start making randomly shaped pieces? It doesn’t mean that you have to implement it or use it all at once (in fact I never recommend that). Know the end integrated systems, and implement, train and master each component at a time. Please, don’t pick a Point of Sale, then ask me to make an inventory system just fit in-between a Point of sale and Xero later.
By maximizing your data collection, and having the data to fine tune and grow your business, the investment you make in the Xero eco-sphere will not only improve business performance in the short term, but it will maximize the business value in the long run.