Technical expertise, but a lack of financial knowledge
Our client, a company we refer to as RxSoftware (not the company’s real name), offers a niche “software as a service” product within the prescription drug delivery ecosystem. Hospitals, pharmacies, and other entities that dispense ethical drugs must track where every pill goes, and RxSoftware offers a cloud-hosted software system that allows their clients to meet that requirement.
When G-Squared started working with the company, it was still relatively small. As with many small businesses, RxSoftware focused its limited resources on building its product and generating sales. While the team was skilled at developing software and knew the regulations and real-world challenges involved in tracking drug prescriptions, no one in-house had much finance or accounting knowledge. They had someone come in every month to handle the monthly financial statement closing, but when we first met with RxSoftware’s founder, he admitted that their books were “a mess.”
G-Squared was engaged after RxSoftware had secured $1 million in funding (a convertible note) from an investor with the stipulation that they hire someone with the right know-how to address their accounting problems. Such issues included an IRS fine related to a payroll tax issue, among other concerns. G-Squared is often hired to help companies after a Series A funding round when the board of directors expects more rigorous financial and operational reporting.
Focus on cash flow leads to a sale
RxSoftware had always been faced with cash flow problems, mostly due to its long sales cycle of four to six months. This lack of liquidity raised concerns about its long-term viability, which further hampered the sales process. We helped the company develop realistic cash flow forecasts showing they would need to raise more capital to remain viable. In the process of identifying potential investors, a much larger firm in the industry approached RxSoftware about acquiring the company, as it appeared to be a good fit within their “vertical.”
We helped RxSoftware prepare a financial model as to how their client base and cash flow would grow if they could convince potential clients that they had the financial resources to support the business over the long run, which had hindered growth in the past. Along with developing these projections, we helped to prepare due diligence materials for the buyer.
These materials made heavy use of the revised (cleaned-up) monthly financials and supporting work papers that we had already prepared, which is G-Squared’s standard approach – we make all of our analyses suitable for use in an eventual due diligence process. Meaning our clients do not have to create new accounting records and financial reports when it is time to raise capital or sell the business- because the reporting and data analyses created for other purposes can meet that need.
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The sale of RxSoftware closed in February 2020, one month before much of the U.S. shut down due to the COVID-19 pandemic. Despite the significant uncertainties and challenges of that environment, the company grew from 50 to 300 active clients and achieved a 300% growth in sales over the next nine months. With the backing of its new owner, the company’s potential is now being realized.
RxSoftware’s CEO enthusiastically offered the following testimonial: “Any entrepreneur or small- to mid-sized business owner should engage G-Squared to help them get their financial house in order. Entrepreneurs tend to be terrible at finance and accounting, and G-Squared’s rigorous, disciplined methodology will set you on the right path. Their process provides a ready framework for raising capital or selling your business, preparing you for the due diligence process – which is quite an adventure – when the time comes.”
“G-Squared has a talent for being able to plug in and switch very well. We spent a lot of time on our financials to understand the business at a very deep level. This has given me a lot of value-added strategic input into how our financial numbers drive business decisions.”