Will my accountant’s mistakes scupper angel investment deal?
I’ve discovered my in-house accountant has made some quite serious errors which are likely to impact on our profits for this year. I’m in the early stages of raising angel finance and am concerned the deal will now break down in due diligence. How should I handle the situation?
A. Alysoun Stewart of Grant Thornton writes:
This is not a problem that anyone would wish to face on the eve of raising finance. The saving grace is that you uncovered the errors yourself and have the opportunity to remedy the situation before due diligence commences.
Business angel investors often adopt a rather different approach to investment appraisal and may factor into their evaluation that some shortcomings in management capabilities are a likely characteristic of the early-stage businesses that they review. They are typically successful entrepreneurs in their own right, or from business consultancy backgrounds with a proven track record of developing successful business strategies, and therefore they often seek to be actively involved in the investee company.
However, like any other investor, they need to be able to satisfy themselves as to the reliability of the information with which they are provided – uncertainty and unwelcome surprises are the kiss of death for many an investment.
Prior to any investment the discerning business angel will critically review your business plan to assess the future potential of the business. They will be looking at the following areas:
… the product or service’s competitive advantage or unique selling point
… an evaluation of the market size and growth potential
… the potential upside for the investor
… expertise and track record of you and your management team
The purpose of the due diligence is then to support the investor’s initial positive assessment of the business proposition. It is critical that a company seeking finance has in place reliable management information systems so that it can demonstrate effective management control as well as a clearly articulated strategy. It will be an important demonstration of your own management credibility that prior to any due diligence you have performed your own audit to identify any errors or weaknesses, and have developed an action plan to address them and ensure that the problems that have arisen do not recur. It would be impossible to overemphasise the crucial importance to an investor of reliable fi nancial management information.
In the circumstances you have described you may need to engage external advisers to lend the necessary credibility to the preparation of the business plan and the fi nancial projections. If this means delaying the process by a few weeks then that is a price that has to be paid.
Communication is the key – let your potential investors know as soon as possible how the errors occurred, how they have impacted on any data that they have already received, and provide them with updated historic and projected fi nancial information so that they can make a properly informed judgement.