What's the best way to learn about analyzing a company's financials?
January 09, 2019
by a searcher
in New York, NY, USA
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7Replies
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Reply
by a professional
from Harvard University
in Boston, MA, USA
Broadening the question to financial AND operational analysis, here are a few steps to systematically get the ball rolling and guide your analysis:
1) ask current owner what KPIs he/she watches most closely
2) find industry bench marks to at least orient you on what others find most critical - note that finding metrics that are genuinely relevant to a firm's niche and size can be challenging
3) identify a seasoned industry operator/investor/expert who can help you identify the highest priority metrics for a firm at the target's stage of growth
4) talk to an investment banker who knows the space and can speak to the value drivers specific to that industry to ensure you are positioned to add value in these ways - it could be same person who weighs in on last point
5) reclassify revenue/expenses to ensure your financial reporting is actually accurate. it's rare to find a lower middle market firm with accurate financials. here's an article that touches on how gross margins can be misleading, as an example: https://www.driveninsights.com/small-business-finance-blog/how-to-find-gross-profit-percentage.
Reply
by a searcher
from Michigan State University
in St. Louis, MO, USA
First define what your objective is in the analysis, and how granular it needs to be at any given point, to move you towards your objective timely; to stave off analysis paralysis; avert exhaustion of seller/ relationship damage to your onslaught of requests; leaving seller some reserve in their tank, for the bank's turn to crawl all over them, etc. The skills contributing to good analysis on the one hand, engender a tendency to overanalyze on the other. Set gates/ establish minimums, to prevent putting the cart before the horse. Examples: this is what I need, to commit to making an offer; this is what I need, to commit to due diligence; this is what I need, to keep in mind what we need to do once we own it (and thus inform our plan/ forecast/ value proposition). And 100% agree, there is no substitute for practice: deals are both art and science. What you want to know and what you need to know are not the same, and what you can actually get will be deterministic. The more you investigate, the less you have to invest. But don't lose the deal over it. Business is the management of risk, not the elimination.
from Harvard University in Boston, MA, USA
1) ask current owner what KPIs he/she watches most closely
2) find industry bench marks to at least orient you on what others find most critical - note that finding metrics that are genuinely relevant to a firm's niche and size can be challenging
3) identify a seasoned industry operator/investor/expert who can help you identify the highest priority metrics for a firm at the target's stage of growth
4) talk to an investment banker who knows the space and can speak to the value drivers specific to that industry to ensure you are positioned to add value in these ways - it could be same person who weighs in on last point
5) reclassify revenue/expenses to ensure your financial reporting is actually accurate. it's rare to find a lower middle market firm with accurate financials. here's an article that touches on how gross margins can be misleading, as an example: https://www.driveninsights.com/small-business-finance-blog/how-to-find-gross-profit-percentage.
from Michigan State University in St. Louis, MO, USA