Why operators evaluate businesses differently from analysts
There is a category of judgement that does not show up in a spreadsheet, and it usually comes from having run something yourself.
Financial analysis is a discipline with well-defined tools. You can be taught to build a model, stress a covenant, and read a cash flow statement properly. What is harder to teach is the sense of whether a business is actually well run — and that sense tends to come from having been responsible for one.
The things that do not appear in the model
An operator reading a set of accounts notices different things. Why did headcount grow faster than revenue in one particular year? Why is the receivables ageing concentrated in three customers? A rising gross margin can mean pricing power, or it can mean a business quietly cutting the maintenance and training that will produce a problem two years out. The model shows the number. Experience suggests which explanation to test first.
Assessing a management team as a peer
There is also a difference in how founders are assessed. Someone who has met payroll during a bad quarter asks different questions than someone who has only ever read about one. Not harder questions — more specific ones, and usually questions the founder is relieved to be asked, because they are the questions they have actually been wrestling with.
Why this matters for a capital raise
Every business has weaknesses. The purpose of an honest evaluation is not to hide them but to know them before an investor does — and to be able to say, credibly, what the company is doing about each one. That is a far stronger position to negotiate from than a file that presents a company as flawless and then unravels under diligence.
Our directors run operating businesses across mining, manufacturing, education and commercial real estate. Each of those has, at some point, needed capital and negotiated for it. That experience is not incidental to how we evaluate the companies that come to us — it is the method.
This article is general information about the financing landscape, current as of its publication date. It is not financial, legal or tax advice; regulations change, and every company’s position is different.
