Bad books can cost you a lot when dealing with private equity investors

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If you were to discuss this subject and the market in general with an investor, and if you were to ask them:

● How do you decide where to invest? Which companies are your preferred choice for investment?

It might be a complicated question, but you will usually get the same answer, the answer most investors ask over and over:

What is the risk level?

The question becomes fairly obvious once you take into account that mitigating risk is crucial for all companies trying to get their business off the ground or to the next level.

In all fairness, every investment is fundamentally risky; there’s no way of going around that. But if you are going to attract an investor, no matter how big you are, you need to realize that every investor is looking for a safe bet. As that’s impossible, you need to make sure you present your company as the closest thing to a safe bet.

No matter the type of investment, every investor will go over your company history and its accomplishments, and they will do it in as much detail as they possibly can. They will always want to see that your company is worth investing in.

In many cases, maybe even in most cases, there is only one factor that turns them away from your business – bad books.

Bad vs. clean books

An investor wants to see clean books because they provide them with:

● Basic facts about the financial health of your business

● Proof of the growth of your organization

● An indication that you know how to run your company

● A somewhat clear picture of how you grew your company from the very start

If your books aren’t clean enough, the investors won’t be able to see any of this. What’s more, if your books are a complete mess they will see that there’s no reason to believe that their investment in your company will be worthwhile.

So, before starting to pitch to investors, it’s essential for you to take a good look at your books to determine if they are bad or good.

What can you do to check the validity of your books and where do you start with that?

We at Consero have found some of the best ways to start on this path so keep on reading to discover how you can do it for your company.

You shouldn’t wait

We will start with the most critical advice we can give – you should never wait when it comes to getting your books cleaned up. The longer you stall, the more expensive and significantly time-consuming it will become.

If there is any talk of investors, the first thing that you should start doing and the best thing for your business at that moment is to start the whole ‘clean-up’ process as soon as possible.

We are saying this because of the process:

● Requires the help of trained and skillful professionals

● Can be very time-consuming and thus last for a long time

Yes, it’s true that this will cost money, but the worth of the following results is much higher making this one of the best investments you can make at the moment.

Transparency matters to investors more than you think

Simply put, investors love metrics. They want to see a clear sign that you are not hiding anything, and the only way to persuade them that you are as transparent as one can be, is to have:

● Clean

● Concise

● Easy-to-read financials

That’s very important because when investors come to your company, they want to begin and maintain a strong relationship with you and be your partner. By being open and transparent, you are effectively showing to them that you want the same thing. Transparency is an open invitation for partnership and implies a will to let these partners into the whole process.

The importance of clean books

Companies often forget how vital and influential clean books are, especially in the case of subscription-based businesses.

Losses are often there on the surface, yet are hard to be seen because prepayments and recurring contracts can get you to misjudge some projections.

However, if you have clean books and thus accurate accounting numbers available for you at any point, you can easily avoid the previously mentioned issues. You can also start making smarter, strategic decisions when it comes to how you run your business and its finances.

That’s more than merely convenient; it’s essential as investors want to see that you have a firm grasp on your company’s finances. They also want to know that you can effectively analyze what you have.

Naturally, you don’t need to know everything about accounting or be an accountant yourself, but you have to:

● Know how to read the financial reports in your company

● Use these reports to impact your company with strategic decisions

All of this also matters to investors because they, as shareholders, have a right to access clean and professionally run books. It’s crucial for all companies that are compliant with the Generally Accepted Accounting Principles, or GAAP.

Books lead towards a good exit strategy

Many businesses are looking to exit through acquisition. If you’re looking for that and you’ve passed a couple of funding rounds, buyers are now probably looking into your business. If you’re looking to become an attractive acquisition for them, know that your books are an essential factor that plays into their decision.

Clean books can bring them a step closer to buy, while bad books will quickly send them away.

That’s another reason for you to keep clean books. It also means that it might be the time to indeed start working on getting them in order by corroborating with professionals, using some newer and effective accounting software, and more.

All of that will enable you to be prepared when the time comes to meet with investors, and it also means that you will only need to have that very meeting on your mind and nothing else.