The Importance of Frameworks in Presenting Financial Information

Posted on: March 6th, 2018

financial information framework Closing deals requires presentation of massive amounts of financial information. Certain lenders require monthly financials, others prefer quarterly or annual.

Often, the need to satisfy information requests results in rote-like data room population and unfiltered exchanges.

As more deal doing has gone digital, it is not unusual for a prospective borrower to send out the entire set of financials in the very beginning during the introduction phase via email.

Inexperienced brokers, long on email reach but short on expertise, exacerbate this tendency, consigning their clients to dreadfully exhaustive queries down the road.

What these folks don’t realize is that it never pays to fling financial information to a third party, unless you have reviewed, analyzed and framed it. Many middle market companies have incomplete financial reporting.

Often internal statements may have accounts not properly classified, or strange adjustments that skews their relevance.

Additionally, there may be several things going on within the fundamentals of the business that may make review of the financial statements meaningless.

Growth companies often have huge spending for business development or R&D, commingled in the P&L results of a profitable base business.

Often the new spending is sizable enough to crush overall profitability of the enterprise making it look like loss making. It always makes tremendous sense, during the early stages of a deal, to slow down and make sure that the company’s financial statement tell the proper story.

This is done through the use of conceptual frameworks. These frameworks allow you to show the company in the proper context, so that the lender will understand the numbers and understand the real dynamics of the business.

Here are 4 ways to do this to ensure your deal has the proper conceptual frameworks to maximize its financial appeal.

Unbundle the segments – showing historical profitability on a line of business basis allows you to focus a lender on the underlying stability of a profitable segment. It allows them to see the combined red ink as discretionary spending that can be controlled in a downside case.
Pro forma framework – deals rich in pro forma frameworks have higher valuations and higher incidence of closing. Comb through the detail of the financial statements to identify one-time & non-recurring expense and present them in an objective and defensible framework.
Growth framework – It is always more compelling to lay out revenue forecasts on a product line basis. Simple revenue frameworks allow the lender to get a quick handle on how you plan to grow.
Use a Bridge Analysis – often financial statements need a framework to bridge from a summary to a detail schedule. This shows you are focused on data integrity and are presenting quality controlled financial accounts.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.