Big Hats and No Cows

The red flags in Commercial Due  Diligence all come from reading the gaps.

Any ‘dressed company’ in a sale process will put it’s best foot forward, but it can very quickly sink into the as ‘Big Hat and No Cows’, ‘All Mouth and No Trousers’, ‘Fur Coat and No…’  commentaries that can kill a deal.

The biggest red flag of all is how closely (or not) a company’s stated profit/ebitda matches net operating cashflow. Buyers buy future cashflows. As the saying goes, Sales is Vanity, Profit is Sanity, Cash is Reality.

In subscription businesses a 1:1 ratio is the norm, ie cash should be at least the same number as the profit. Large PLCs, especially those in GRC circles, such as Sage and Thomson Reuters, lead with the cashflow number. They positively brag about it. It’s the first number the institutional investors flick through the pages of a report to find.

So when a team like Citation shouts about every number except the cash one, it is a hollow victory. Yes they’ve paid a lot for EPM, done good (smaller) deals in safety specialisms and are now a £56m+ business. But until the cashflow number comes out of hiding in Jersey no-one will care.

Peninsula’s ‘17 group accounts by contrast show cashflows running ahead of operating profit. It matters. What you see is what you get there.

If you don’t get past this basic financial tyre kick, guess what?

The discussions around ‘owner benefits’ and adjustments to show an ‘underlying’ profit level come under a very strong and harsh searchlight. The assumptions are no cows, no trousers, no…

It’s not about ‘dressing’. Chemistry closes deals, not tactics or structures. And chemistry needs trust.

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