Data: The remedy to risk

Data is the remedy

The best approach to minimising risk is to connect the story of the business with robust data. We have found that sharing data early in the process:

• Quantifies identified risks and opportunities;
• Facilitates in-depth discussions based on facts, not perceptions;
• Equalises knowledge between buyer and seller;
• Reduces or eliminates surprises in due diligence; and
• Increases the certainty of closing.

Acquirers approach investments with healthy scepticism based on known and unknown risks. It is impossible to remove all risk, but one must identify, quantify, and minimise known risks.

Good data can illuminate past and current performance, set the groundwork for forecasts, and decrease investment uncertainty.

Example: The logistics industry

With the marked increase in freight rates across North America in the last year, many logistics businesses realised increased revenue and earnings. The risk to acquirers is that these elevated earnings may not be sustainable. To address this pricing risk, parties can quantify the impact of increased freight rates by analysing detailed shipping data.

The first step is to analyse the data and discern trends in key performance indicators such as revenue per shipment, profit per mile, revenue from new customers, and shipments per month which will provide clarity on what has driven the changes in earnings.

Then, supplement the data with a review of macro- economic and historical trends to:

• Contextualise – understand the impact of factors outside the logistics industry;
• Benchmark – compare company figures to industry average; and
• Forecast – review historical results to estimate future sustainability.

Completing this data-driven exercise uncovers the complete story of business and earnings performance in the past, present, and future. Minimising the investment risk comes from understanding earnings and business trends independent of the known risk of fluctuating freight rates.

Conclusion

In today’s market, acquirers are rightfully cautious. Negotiations commence at the very beginning of a sales process, and to get the right valuation with an appropriate structure buyers and sellers must take extra steps to build confidence, reduce uncertainty, and provide support for sustainable earnings. Our suggestion – use data as your guide.

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