11 Apr Environmental Social and Governance reporting could help SMMEs land the big deals
Environmental Social and Governance reporting could help SMMEs land the big deals
The news is full of rags to riches companies that have made it big through an investment or acquisition. From fintech to biotech to the university dropout who started in their garage with a dream and wifi connection, our newsfeeds paint a picture of fairytale-like entrepreneurship success stories. Reality, however, seldom measures up to these stories and SMMEs looking for their big acquisition opportunity, or even to raise growth capital, need to apply themselves to the fundamentals of good governance if they hope to see investors take them seriously.
Think like a corporate, report like a corporate
While banks may focus on balance sheets, when it comes to dealing with institutional investors, you can expect a thorough inspection of how you have planned for the future.
Sustainability is key to asset managers because they are less interested in one-off deals like the banks, and so the future health of the company is vital to them. For asset managers, deal two and three with a company hold the key to unlocking real value and so they are particularly interested in the company’s vision. This goes beyond the realm of financial reporting and examines how companies will be interacting within their communities and their immediate environment.
This emphasis on sustainability is not something new. Over the past three decades shareholders have become increasingly concerned with how the companies they support are viewing their role in the world around them. The number of stakeholders has increased to include employees, customers or clients, service providers, regulators and society at large. The Triple Bottom Line accounting framework has been adopted by some companies, focussing on social, environment and financial aspects of the organisation. This is now more important than ever and, at the very least, could serve as a checklist on the resilience of the company.
Larger companies are used to these shifts and have adopted some measure of integrated reporting. This includes addressing issues like: commitment to good corporate governance; environmental impact and risk assessments; and social impacts, both internal and within the larger community. King IV and Environmental Social and Governance (ESG) scorecards are used by business leaders to ensure they are not only on the right side of the law, but that they are cognisant of their company’s future responsibilities to investors.
Take the pain now, reap the rewards later
For the smaller company all these requirements may sound daunting. Both from a time and a financial resources point of view. However, we believe that by considering the various elements of ESG reporting sooner rather than later, SMMEs are demonstrating that they are disciplined in their thinking and their behavior. Investors like the fact that a small company has a clear vision for the future. That it is planning and putting structures in place which shows that it is already thinking like a larger company.
Having these disciplines in place may not assist SMMEs with their initial financing deals, but when they are looking for second round financing investors will go far deeper than a cursory scratch on the surface. By way of example, we know of a small business that was recently acquired by a big corporate. Because all their reporting governance structures were not in place, they went through an eight-month due diligence round, where they almost lost the deal. This incurred associated legal and auditing costs which might otherwise have been avoided if they had made the initial investment, adding these controls earlier on.
Getting the basics right is a good place to start
Business leaders are expected to be technical experts in their field. An investor or potential buyer expects them to know their product and their markets. When sitting around a negotiation table however, investors are looking at the fundamentals of the business, including financial discipline. When an investor asks about long-term vision or even specifics about current financial standing and the owner of the business refers you to their auditor, it doesn’t fill you with confidence. We expect the leaders of the business to be on top of their financials, producing monthly management accounts which are at hand and show an ongoing and close scrutiny from within the business. It’s about being able to tell the story of the business, the past, the present and also the vision of the business, including forecasting and a clear ability to defend the assumption of the forecasts.
A clean and accurate reflection of the business must be presented. Company organograms which show that due consideration has been given to the staffing requirements of the entity, as well as evidence there is sufficient insurance in place to protect the ongoing operations, are all non-negotiable requirements. This also extends to a solid plan about how to manage resources including energy, waste and water.
While everyone loves the passion and pace of start-ups, investors are looking for signs of business maturity in a company’s board. This means showing evidence of how seriously the company’s leaders take their role in the marketplace, in the community, and in the world they inhabit. Finding a partner which can help you meet these requirements will ensure your company is taken seriously by investors, cut down the time to find a suitable investor and, may even affect the quantum of the investment.