Business Review in the Entrepreneur-led SME

OWNER/MANAGER BUSINESS PLANNING

Entrepreneurially founded business are often substantially driven by one or two principal shareholders: key personnel who have grown and shaped the business from its naissance; often by leveraging prior business sector experience or an idea for an opportunity, mixed with their abundant energy, enthusiasm and strength of personality. Often, they operate as ‘free rangers’, facing little input or challenge from minor shareholders and incomplete second-tier management structures.

A commonly recurring scenario observed in many small and expanding businesses is one where the company’s MD also serves as the chief salesman or engineer, and tier-II staff carry out overlapping or dual functional responsibilities. The leadership and management structure that established the heart of the business may not be best resourced to guide its future, especially when a previously successful and autonomous owner/manager-led organisation encounters the sterner reporting strictures of private equity sponsorship or debt lending.

Throughout its 25-year history, CSA has frequently been tasked with conducting commercial reviews of small and mid-sized companies as part of their applications for funding or search for additional equity. Commercial diligence involves a comprehensive review of business strategy and direction, encompassing current trading performance and future prospects. This will also include a review of the trading environment and the market’s opportunity, drawing conclusions about competitive positioning, unique selling points, sources of intellectual property and sustainable commercial advantage.

ACCOMODATING IMPERFECT INFORMATION

Commercial review is in essence the quest for consistent, quantitative information in what is something of an empirical process. However, the day-to-day reality of many small, fast growth businesses is that the focus of management’s attention is on revenue generation; getting goods and services ‘out the door’ in line with order fulfilment promises and less on record documentation and functional reporting systems. These practicalities have immediate implications about how the commercial review should be scoped.

Project scope should acknowledge possible variances in how any historical trading statements and forecast plans are formulated and presented in the business. Historical revenue and margin data are most usually segmented in some level of detail, such as by leading customer, product category, sales geography or end-market application. However, this hard information can then be bridged to more opaque sales targets, without reference to clearly articulated customer targets and prescribed routes to market.

Low forecast visibility can, of course, be attributed to market volatility and ad hoc customer trading habits. However, ill-defined forecasting may be symptomatic of weak commercial organisation and market understanding as a business function. For example, an overreliance on ‘top-down’ management forecasting and extrapolated historical customer sales data, rather than ‘grass roots’ customer and market insight.

UNDERSTANDING COMPETITIVE POSITIONING

In cases where the commercial forecast numbers supporting a business plan are weakly defined, the commercial review can be scoped to provide an analysis of the company’s internal strengths and weaknesses relative to its external opportunities and threats. Gathering the supporting evidence for a SWOT analysis is relatively straightforward. It involves close dialogue with the management team and cross-referencing this information with fresh market research, inclusive of customer references and any further references from past customers, suppliers or other supply chain partners.

Taken to a next phase of assessment, the company’s strategic positioning can be modelled in a two-fold examination of a) commercial risk vs likelihood of occurrence and or severity and, b), industry attractiveness vs company strength. Although somewhat qualitative in its method of modelling, this analysis can serve as a practical guide to the strength and standing of the business’s commercial attributes and prospects.

CUSTOMER PIPELINE ANALYSIS

A more quantitative analysis of the short, medium and long-term customer pipeline can instil confidence that the objectives laid down by the business plan and forecast are realistic and achievable in a timeframe commensurate with the financial case.

By allocating a weighted probability to the company’s anticipated revenue streams, the reporting consultant may work with the management team to prepare a sensitised, line-by-line, build-up of the revenues that can be expected from all of the company’s trading activities over a timespan relevant to the investment. This type of model can accommodate KPIs such as a calculated customer enquiry conversion rate, quotations issued and the number of known bidders for example.

A variant of this might include a model of the company’s award of contract pipeline over a set window of time. For example, the values of contracts expiring by date vs won, but not started; tendered, but not won and, lastly, identified and not tendered.

Reviews of this nature can illuminate the pattern of recurring revenues in the business. Taken together with customer referencing, for example, they can confirm – or challenge – management’s vision of top line business performance and the direction of growth.

CREATING TRANSACTION VALUE

Independent business reviews, incorporating both qualitative and quantitative analytical techniques, can distil the presented business case down to its most sustainable sources of revenue and profit growth. Understanding which levels of business trading are most secure within the company, along with knowledge of potential upsides or downsides, enables the entrepreneur-led SME to clearly articulate business growth and expansion ambitions in discussions with financial backers.

CSA’s strategy and due diligence advisory services sit alongside and complement the day-to-day activities of company management. We provide independent and objective evaluations of strategic direction and customer value creation, providing a road map for business performance improvement.

For information about how we can help you to assess business and market attractiveness please call: 0208 947 5108.