Opinion: Paul Spires

For many high growth companies the decision of when and if to recruit a full or part time Finance Director (“FD”) rather than using a book keeper or firm of accountants to produce the accounts can be a challenging one. Getting the decision right may potentially impact both the future direction of the business and its speed of development.

Despite the initial perceived costs, the practical benefits of having a good quality strategic FD within a business, usually a qualified accountant, can be considerable. For example, an FD may:

• take pressure off a managing director, enabling them to focus on driving the business forward rather than fire fighting
• ensure the financials are brought under control to produce timely and accurate reporting to aid decision making
• act as a sounding board to sense check ideas/initiatives of the management team from a financial point of view

Additionally, from a corporate finance perspective, whether a management team is seeking a sale, refinancing, or private equity investment, having an FD on board significantly increases the chances of success. The benefits to a deal process can be substantial and include:

• reassurance to an investor that someone is completely in control of the financial position of the business
• a history of accurate monthly financial results is more likely to be available – it is difficult for an investor to support a business without knowing what they are investing in!
• budgets are more likely to have been constructed on sound assumptions, which performance can be monitored against
• an FD, in conjunction with the MD, frequently acts a key project manager within the business itself, in respect to preparing for a transaction, during a process and after completion

These tough economic times are undoubtedly sorting the weak from the strong and more than ever having someone within the management team with financial expertise can be critical. An FD can assist in making informed decisions, help foresee potential problems, take action to avoid them and put in building blocks to drive forward the growth of the business. A part time FD may be a cheaper option than a full time equivalent, although which is preferable depends on the nature of the business and the specific requirements of the role.

With banks on the look out for early warning signs of trouble ahead, having an FD on board can help management to stay ahead of the game – the last things banks want at the moment are surprises. Once promises are broken it is very difficult to restore trust.

With many private equity backed firms loaded with debt, much of which needs to be refinanced in the coming months and years, the resurgence of interest in an IPO as an exit option seemed like the perfect "get out" solution. Whilst debt remains expensive and difficult to obtain it makes it all the more harder to exit at a high return, especially for those private equity players who bought at the top of the market.

With the news that New Look has followed the Merlin and Travelport example of scrapping their flotation plans, the magic bullet of flotation looks set to remain elusive for some time yet, especially for the largest private equity backed deals.

The insurers, large pension funds and other institutions which tend to buy up the majority of shares on new company listings seem to have got wise to the dangers of overpaying. With the FTSE still over 5,000, up from the low of 3,500 in March 2009 they are not the only ones who are questioning if share prices have peaked - after all, why else was there the apparent rush by large private equity backed businesses to the IPO option now?

Whilst problems therefore remain for the mega private equity deals which were done at the top of the market, the opportunities in the mid market have undoubtedly been improving. Pent up demand to do deals has been growing over the last 18 months - vendors are thinking what am I waiting for? (Except capital gains tax rises!), appetite has been increasing from potential trade acquirors and both primary and secondary private equity backed buyouts are back on the agenda.

The mid-market equity players can't sit on their hands for ever - ultimately they need to invest money to make money. These changes in part at least have coincided with the gradual change in the attitude of banks to one where writing cheques to support mid- market deals (typically £50m in value) is now back in the realms of the possible and not just to support existing clients. Whilst still by no means easy to raise new debt, for high quality businesses at least the doors seem to be opening.

Now could be as good a time as any to get a foot in the door.

Numerous fast growing companies get into trouble each year due to overtrading – despite being profitable and having a sound business model, failure occurs due to a lack of cash. The sad truth is that in many such cases if the underlying cash requirements (and causes) had been highlighted early enough and appropriate corrective action had been taken, it may never have happened.

For a management team to make informed strategic and operational decisions to target opportunities and mitigate risks, something more than a gut feel approach is required. Many entrepreneurial businesses which have grown rapidly on the back of a great idea will at some stage start to face difficulties if they do not have proper financial reporting processes in place. Very quickly a CEO may find themselves distracted from the day job of driving a business forward and instead be fire fighting on issues which could have been relatively easily avoided had early warning systems been in place.

The power of targeted, timely and accurate financial information cannot be underestimated. Whilst it is difficult to fully portray the potential benefits in an article (first hand experience is undoubtedly the best method!), if a management team is unable to answer any of the following questions, it may well be time to reassess whether the current financial reporting meets the needs of the business:

1. How much cash and profit has the business generated this month?
2. Has the business got sufficient cash to make the investments needed to stay competitive?
3. What are the key drivers of profit/cash within the business?
4. What projects or customers are most profitable and which new work should I accept?
5. What will profitability and cash look like in possible “what if” scenarios?

After all, how can management be sure that they are making the right business decisions without knowing all of the facts?

Is it just me or is the press overdoing recovery in the UK?

Sure, banks do seem to be increasingly lending, share prices are rising (usually it seems on the back of bad news!?), the government spending spree may be filtering through to the wider economy and people seem to be feeling more confident about the state of the economy.

However, in the back of my mind this all seems a bit too rosy. Whilst saying that events are brewing to a perfect storm may be a bit extreme we all need to be careful not to bury our heads in the sand. The government borrowing will have to be repaid at some point (borrowing money as a solution to borrowing too much money was always going to come back to bite), there is an ageing population which will impact on tax revenues in the medium term, there are latent inflationary pressures which will no doubt force up interest rates (and hence debt servicing!) in due course, cuts in the public sector will undoubtedly have to occur (even the relatively politically sensitive areas such as education and healthcare will I fear come under pressure) and unemployment will continue to keep rising (and thus impact on consumer spending power).

When transacting in the current environment, all parties need to keep their prudency hat on. Funding structures, whether backed by debt or equity, need to be able to ride out any potential storm ahead, especially if in the medium there may well be a ‘double dip’ which some people are beginning to fear. Some pretty tough sensitivity scenarios should be considered when assessing risk vs. return before parties sign on the dotted line…

On a more positive note though, adversity also brings opportunities and management/businesses need to ensure that they are as well placed as possible to capitalise on these when they arise. Taking time out early on to assess risks and identify ways that they can be mitigated before undertaking a transaction will significantly increase the chances of both the transaction completing and as importantly the business being able to keep its head above water if the seas get a bit choppy on the journey!

The last few weeks have actually been pretty refreshing in respect to some of the meetings I have had with banks. Whereas 6 months along the majority may as well have brought a noose along with them to meetings, many of the bankers I am seeing have, dare I say it, begun to show glimpses of optimism. That is not to say that getting bank debt into a transaction is easy, it is not and remains challenging, especially where a non incumbent bank is involved, but more that there is a growing sense that the credit committee constraints that tied their hands to write new cheques is easing and some appetite to do deals is returning.

However, due to the relatively low competitive pressure in the banking market the pricing of bank debt will remain relatively high, terms tight and quantum of available lend restricted for the foreseeable future . It will undoubtedly take some time to improve significantly and it is highly unlikely to ever return to the levels and terms at the height of the credit bubble, quite rightly in my opinion.

Nevertheless, whilst banks can talk the talk of doing deals the proof is in the pudding and the preference towards favouring deals supporting existing customers rather than new lends continues, due to their over-riding fear of the unknown. Traditional banker prudence has returned but the pendulum remains stubbornly stuck to the one side and the inertia will take many more months to ease.

Banks remain cautious to back the right horses and in many cases the banks have been looking for reasons not to lend rather than the other way around. Having an understanding of each of the key lenders current appetite for debt, which is changing on a daily basis, is critical in getting deals to the finishing line in the current market.

At Catalyst, it is our job as advisers to understand who is genuinely open for business and also to truly understand the risks and mitigating factors underlying the businesses and transaction structure from the banks perspective, whether that be a pure refinancing, support for an acquisition or an MBO. The more homework that can be done upfront, the better the chances of a successful transaction.