Using Financial Diligence as a Growth Lever

Insights from Scale & Grow. Session delivered by Karen Allan and Lucy Tobutt-Denny, Partners at HaysMac.

The final stage of a fundraise is often viewed as a hurdle to be cleared, but good due diligence and financial hygiene is a primary building block for business value and a "green factor" for investors. It is not just about avoiding traps; it is about professionalising the business to unlock potential upside and secure a premium valuation. When a founder understands their numbers, they move from a position of defense to one of strategic strength.

Financial Hygiene as a Value Driver

Karen Allan emphasised that financials are a foundational building block. "Ultimately, it could unlock successful business if you are in a good position," Allan noted.

For institutional investors, a clean back office is a proxy for a robust business model. If a founder can sign up to any challenge on their forecast during a pitch, it signals a high level of operational control. This professionalisation allows the business to move beyond the startup phase and become a credible candidate for public capital or institutional debt.

Managing the VAT Reverse Charge for Professional Scale

A common technical hurdle is the £90,000 VAT threshold. Lucy Tobutt-Denny identified the "Reverse Charge" as a specific area where fintechs can demonstrate professional rigor. If a pre-revenue business is buying services from overseas - such as US-based developers or AWS - the value of these services counts toward the UK VAT registration limit.

While crossing the £90k limit requires registration, managing this correctly is a signal of "institutional grade" operations. By proactively registering and reclaiming VAT on expenses, a fintech can optimize its cash position and prove to investors that it is making the most of every available scheme to fuel growth.

Incentivising Superstars through EMI

To attract the talent required to hit Series A benchmarks, fintechs must offer more than just cash. The Enterprise Management Incentive (EMI) scheme is a functional tool for buying a team into the ultimate success of the business. By setting up an EMI scheme with an HMRC-agreed valuation before options are granted, a founder ensures that employee shares are taxed at 10 percent Capital Gains rather than higher income tax rates.

This is a strategic upside: it aligns the team with a 7-10 year exit journey. Investors view a well-structured EMI scheme as a massive green flag for retention and long-term motivation.

Capturing Future Value through Tax Losses

Karen Allan noted that being loss-making is not a "bad story" in the early stages. "You are effectively generating a future value for the business when it starts to become profit-making," she explained.

These losses can be utilized in the future to offset profits, ensuring the company does not pay tax prematurely. However, this requires a foreseen plan, especially when expanding internationally. Managing these losses across different entities is a strategic lever that preserves capital for future growth. Demonstrating this level of tax structuring to an investor proves that the leadership is thinking about long-term capital efficiency.

The Strategic Logic of the 18-Month Readiness Check

HaysMac advocates for an 18-month "Mock Diligence" process. This is a traffic-light check on board minutes, IP ownership, and tax filings. The upside of this process is that it removes "Negative Value" items that could otherwise lead to a price chip during a fundraise.

For example, ensuring every contractor has signed an IP Assignment agreement proves that the company has clear ownership of its technology. Identifying and fixing these solution areas in advance is significantly cheaper and more effective than trying to resolve them under the pressure of a live fundraise.

It allows the founder to open the round with a "clean" data room that justifies a higher multiple.

The Scaling Checklist

  • The Negative Value Audit: Conduct a Mock Diligence 18 months before your round. Identify and fix red-light areas early to ensure a premium valuation.

  • The Reverse Charge Audit: Review spend on overseas suppliers. If you are near the £90k limit, register for VAT to avoid penalties and signal operational control.

  • HMRC Valuation Protocol: Secure an HMRC-agreed valuation in writing before granting EMI options. This protects the tax upside for your key talent.

  • R&D Tax Credit Hygiene: Maintain Product Requirement Documents (PRDs) that prove technical uncertainty was overcome. This documentation is essential for justifying R&D tax claims.

  • International Tax Roadmap: If expansion is planned, consult on tax structuring early. Professional management of international losses prevents deal-killing tax traps.

  • EIS Advance Assurance: Obtain Advance Assurance from HMRC before you start pitching. This "box-ticking" exercise proves your business is structurally investable and de-risks the bet for early investors.

Ready to turn insight into action?

Reach out to the team at HaysMac: Karen: KAllan@haysmac.com / Lucy: LTobutt-Denny@haysmac.com

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