Financial Reporting Requirements: Our Process

Small business owners are often apprehensive about the changes that may occur when their business is acquired. When 1719 Partners acquires a company we do not immediately look to change the business. However, depending on the company’s current financial systems, financial reporting is something that may change after the deal closes. This typically means two changes for a business: 1) monthly reporting is completed in a more timely manner and 2) additional financial reporting is required.

Timely Monthly Reporting

1719 Partners receives monthly financials (income statement and balance sheet) from our portfolio companies within 30 days after the month’s end. Most small businesses are not used to producing monthly financials this quickly. While this can be an adjustment, companies eventually see the benefits of timely reporting. It is much easier for all parties to manage a business when you have timely data.

Additional Financial Reporting

All of our companies have a revolving line of credit to manage working capital. A line of credit is supported by a borrowing base certificate. A borrowing base lists a company’s eligible accounts receivable and inventory and dictates how much the company can borrow. Many small businesses are not accustomed to providing monthly accounts receivable aging reports and monthly inventory reports. However, the benefits of access to additional capital (via a line of credit) are greater than the administrative burden of creating these reports.

Financial Covenant Calculations

Banks and mezzanine lenders use financial covenants to monitor the performance of a borrower. These lenders request quarterly financial covenant calculations from the borrower. Financial Covenants give the lenders a heads up if the financial standing of the borrower has changed over a given period of time. For example, one common financial covenant is Total Leverage. The Total Leverage covenant measures the Total Debt (senior debt + mezzanine debt) in relation to the trailing twelve months (TTM) of EBITDA.

So, if the Total Leverage covenant requires that Total Debt must be less than 4.0x TTM EBITDA, the borrower has to perform this calculation each quarter and send the results to the lender in a covenant compliance certificate. If the Total Leverage is less than 4.0x then the borrower is in compliance with the covenant. However, if Total Leverage goes above 4.0x, the borrower is not in compliance and the lender will want to sit down with the borrower and understand why things have changed. Covenant calculations are not difficult, but most small businesses are not used to completing them so it can take some time getting used to.

Individually none of these financial reporting requirements are a big deal, but we understand that collectively it can feel like a burden. One of the things that sets 1719 Partners apart is how we work with you during this transition. We help make the process as efficient as possible, using our wealth of experience to guide companies. This allows us to give our companies access to additional capital while cutting out the accounting headache. If you would like to learn more about our process or are interested in working together, please contact us.