How We Evaluate a Business During an Initial Consultation

In an initial engagement for business planning, fractional CFO services, or business valuations; our initial evaluation of the client’s needs generally focuses on three areas:

1.) Financial health and status of the company’s financials

2.) Current systems and processes that are in place from a financial, marketing and sales, and operational perspective which allow the company to generate predictable repeatable revenue, or lack thereof.

3.) Current risks the business faces and whether mitigation strategies exist

During our initial assessment, the financial health of the company is a critical factor in determining the future needs of our client. We want to analyze the profit and loss statement, the balance sheet, and the statement of cash flows. This provides us with valuable information about the current state of the business financially, and the current state of the underlying financial infrastructure. Depending on the maturity of the client or company, the company may not be able to produce this information, which in and of itself provides us with information about their financial infrastructure. Frequently, the documents produced are messy and do not tell a story. When analyzing the financials, we want to see statements that tell us a story about the company. The numbers should speak about what is occurring in the business, where money is coming in, where money is being spent, and our analysis should tell us if any of the relevant industry ratios are wonky.

Whether or not these financials are produceable in a meaningful way directly speaks to the current state of systems and processes within the organization. An organization, large or small, can always break down into departments. If the financial department is not functioning optimally, this malady tends to spread to other departments within the organization.

Thus, we proceed with an analysis of each of the different departments in the organization and analyze the systems, processes, monitoring of key performance indicators, and the decision-making logic of the organization. Many times, these processes are not documented. However, even if a process is not documented or a KPI is not written down/actively monitored, that doesn't necessarily mean said process doesn’t exist. Businesses, employees, owners and management always already have systems in place; they simply have not documented those systems. We aim to capture what processes exist in an initial engagement, improve upon them, and document them moving forward.

After these two operational assessments, we move on to risk factors in the business. There are many risk factors that can be analyzed, and we generally start off with a few initially and then expand into others as we move through the engagement. Many business operators overlook risk; if they are generating money, they imagine that the business is healthy. This is not the case. Overlooking downside risks can crush a company long-term. One significant risk is owner or key man dependence. If systems and processes are not in place that sanction the generation of revenue, and fulfillment of services or products without owner or key manager involvement, then the loss of that key man is a major risk to the future of the company. Another risk often overlooked is client concentration risk. Many small and medium sized businesses become dependent on one or several very large clients whose discontinuation of services can meaningfully damage the organization.

We aim to provide strategies to diversify client concentration, reduce owner dependence, and create infrastructure inside the business to produce an environment where growth is achievable and sustainable. Investing in planning and operating system improvement increases the value of the business and builds an ecosystem for continued success.