Investing in systems repays itself during business sale
@pwc
Sarah Pilling is a cloud integration partner who is currently consulting to PwC, bringing the Xero eco-sphere to the big-end of town. Learn the insight of how to bring your SME to Big using Xero and existing cloud tools.
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...
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he 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 42 / Issue 12
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.” 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
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