Ian Fishwick, Client Services Director from Evolution Capital, outlines the challenges faced by SMEs when acquiring another SME and how Evolution Capital has reinvented financial due diligence.
There are about 2.5 million small- and medium-sized enterprises (SMEs) in the UK (if we ignore the 2.5 million one-person businesses). There are only about 8,000 companies in the UK that have more than 250 employees. That means that the bulk of companies that are bought and sold, are inevitably, small- and medium-sized.
The quality of information available to SMEs when they are buying another SME, has often been much poorer than that which a larger company would get, when they’re doing an acquisition. The primary reason is because of the cost. Larger companies often spend hundreds of thousands of pounds on due diligence reports that can be anywhere between 50 and 400 pages long.
This means that, at times, it can be more risky to buy a small business because the amount of financial due diligence has been much less.
That is – until now.
For the first time we’re seeing a corporate finance company (Evolution Capital) use its EC Analytics platform to completely reinvent financial due diligence.
The challenge that I set Evolution Capital was relatively simple; but the answer was complex:
- I don’t want to look at a static PDF with hundreds of pages where I have to struggle to find the information that I’m looking for
- I don’t want to look at information that is presented in the form of a seller’s management accounts. I prefer to see it in the style of my management accounts, so that I can look at it and say, for example, “I sell that product and I don’t get margins like that. Why is that?”
- I want an interactive information memorandum that I can ask questions of
- I need all this for less than £100,000 otherwise the cost makes no sense when you’re buying a small- or medium-sized business.
The EC Analytics Platform does things that I have never seen from one of the high-bracket (i.e. super-expensive) corporate finance companies (and I have worked with many of the big ones). Imagine a ‘data lake’ of raw transactions with dashboards, that are bespoke to whatever you want, allowing you to ask questions to your heart’s content.
Why should we be surprised that innovation comes from a smaller corporate finance business and not from the giants. As I said earlier – we are reinventing financial due diligence for acquisitions.