Why due diligence is a positive challenge for businesses seeking funding

Getting a business ready to take on funding to support growth plans requires a lot of preparation and can even require business leaders to change how they think about their business.

The financial numbers are important, but so is the story and the context to provide confidence about the future. Key to that confidence is the strength of the wider management team, especially if the funding is part of a transition or exit plan.

There must also be a willingness to fully engage with the due diligence process and also to respond positively to what is found.

These were some of the themes that were discussed at a Funding for Growth seminar held in Leeds by TheBusinessDesk.com in partnership with Fresh Thinking Advisory, Shawbrook and Ward Hadaway.

“Companies need to have both financial and non-financial information,” said Oliver Reece, managing director at Fresh Thinking Advisory. “Having a really clear story that gets somebody bought into at the very beginning is key.

“Investors will have various different requirements around understanding some of the historical trends as much as anything – so not just the hard numbers, but trends.

“Rolling that forward into a forecast is often key for the process. From a numbers point of view, do the numbers support the proposed structure and investment?

“But also what’s the story it is telling? Where is the business going? What’s the growth story? How do they propose to achieve that?”

Jonathan Pollard, partner at Ward Hadaway, added: “It’s all about belief in the business, belief in the business plan and the people, and a commitment to delivering.

“Ultimately, that’s the journey that people are going to go through to receive the funding and to realise the value that a lender brings to the relationship.”

Part of that value is found in the due diligence process which, when done properly, can challenge management teams to think differently about their business.

Shawbrook director Nick Salmons said: “When we do financial due diligence, it is a real deep dive into the business.

“[Good businesses] see that as a) as them knowing the business and b) is there anything in there that they can do to improve and change the business moving forward.

“As a funder, what you don’t want to see is this financial due diligence being just a tick-box exercise. It is really a challenge to say ‘is your business everything you think it is and, if not, what could you do to change it?’”

Reece agreed about the importance of the due diligence process and added: “It’s not just one of the reports that’s a tick or not. Often it would be a discussion with the team to say ‘how did they actually respond to the questions, were they bought into it?’.

“It is as much a test of the management team as the actual financial numbers.”

The strength of the management team is especially important if the search for funding is also part of a transition in ownership of the business.

Hannah Kirkup, investment manager at Key Capital Partners, said: “From an equity point of view, a lot of the deals that we’re seeing are a cash-out deal. For example, the founder wants to take 50% off the table, they want to go down to three days a week – but they don’t have a management team in place.

“It’s just them and the workforce and when you take that person away, you are often left with no base to invest in. So investing in a second-tier management team is very important.”

The wider management team is also tested throughout the funding process while key members of the senior team are focused on this potentially-transformational project.

Sven Massey, who has led two funding-for-growth cycles at Barnsley-based Distinction Doors, where he is finance director, said: “What surprised me wasn’t the length of time, but how invested you have to be in it. You have to be prepared that your FD or head of finance is basically seconded and your CEO is probably 80% seconded as well.

“For that period of nine months, you’ve got to have enough strength in your business to deal with that. You’ve got to really believe in the team underneath you, and you’ve got to really believe in the rest of the board around you.”