The need to have a robust set of figures which have been professionally checked and validated is never more important than when an investor is thinking of investing in or buying another business, says Leon Joseph of the Corporate Finance team
The television programme Dragons’ Den is now into its seventeenth series. Despite this longevity, the business investment formula remains as relevant as ever, and it is still making headlines. A couple of weeks ago an entrepreneur, Benjamin Jay Smith, wanted to pitch for a stake in his diet and fitness app business. He was a co-founder of the diet and fitness company The Body Coach
of which Joe Wicks is the face, and which has sold millions of books and online body workout plans- I myself have several of Joe’s ‘Lean In’ titles.
Benjamin Jay Smith revealed during his pitch that he had profited by £1.5 million from selling his shares in The Body Coach
and that his ambitions are now to repeat that success in his new venture.
However Benjamin’s business journey has reached a stumbling block. He revealed that he had spent half a million pounds on his new app-based company but had only sold £10,000 in subscriptions at a costly rate of £15 per month. So, despite having already co-founded a successful business that is very similar to the one he is currently working on, he clearly needs some extra help to get his message heard, provide sales and marketing expertise and to use the knowledge and experience of one or more of the dragons.
The pitch highlighted the importance of getting expert guidance, preferably from someone who may have been in your position before. Investors like those on Dragons’ Den tend to have a wide, varied network and can accelerate a business to reach its potential, possibly faster than the founder of a business could do on their own.
Before the show, and before any pitches are made to dragons, due diligence is carried out on each business and individual. However, the BBC do not perform a complete commercial due diligence exercise on each company and individual, due to the cost. This is the reason Benjamin’s disclosure of his profit on the sale of his shares was such a shock to the dragons. Due diligence is the reason half of the investments made on the show fall through.
Closer to home, the Anglia Capital Group is a leading group of ‘angel’ investors in Norfolk and Suffolk. Angels have invested over £1.4 million in entrepreneurs with different types of business, in a structure that is similar to Dragons’ Den, but possibly without the extreme stress of entrepreneurs having their pitch viewed and judged by millions of viewers at home.
The importance of due diligence
Whether presenting a business investment proposition to the angels in Anglia Capital Group (or another investment organisation) or to the dragon’ on television, the business financier needs to know what about the pitch is factual, that trends are consistent and what has been pitched is likely not to have any material changes. Investors are going to poke holes and look for gaps in processes, really trying to understand what decisions are driving the business forward. There are a lot of reasons these deals can fall apart – financial, organisational, or even legal. A good example could be sales figures that are found to be purchase orders that have yet to come to fruition.
Involving a professional adviser from the outset of your business journey is an obvious way of ensuring that the finances are in order, and that there is solid evidence available, if and when it is required. We have all seen a young entrepreneur on Dragons’ Den be ripped apart on the show when they don’t have the information to hand, or the dragons become infuriated with an individual who did not know how to calculate gross profit!
A professional adviser can perform the due diligence required to confirm and verify information that is relevant to the deal or investment. The identification of any defects in the investment opportunity before the deal is negotiated will avoid any bad business transactions.
If you are a business owner and are seeking to find investment, a professional business adviser can perform financial due diligence that will look into:
- Company history and background
- Key deal considerations
- The financial performance, operating effectiveness and earnings quality
- Employee strengths, weaknesses and commitments
- The strength of the financial position
- Cash flow assessment on a going concern basis and
- Tax due diligence
A due diligence process, such as those performed by the professional advisers at Scrutton Bland, will give a business owner more knowledge and therefore confidence around the risks and opportunities of the planned transaction, which means they can enter into negotiations far better prepared and armed with high quality information.
We can advise appropriately so there is no element of surprise when making your pitch. Our advisers will help:
- Review your current business situation
- Advise on any immediate actions
- Determine a range of suitable actions to solve problems
- Inform you of outcomes, whether positive or negative
- Let you make the decisions
- Provide support on the selected option
That way potential investors will be influenced on facts rather than projections or hopeful outcomes when making their investment decisions. Or, in the words of writer Lailah Gifty Akita: “For every great success, diligence is desirable from the beginning to the very end.”