In life you always want to be ready for anything that comes your way. Running your business is no different.
The cost associated with not being ready when a potential investor, buyer or other individual comes to your business is incalculable. We have met with business owners whose transactions fell apart by not operating in a “Due Diligence Ready” state leaving them scrambling for other options.
What does it mean to be Due Diligence Ready? This means having your critical business, operational, financial, and legal information available at all times. The information needs to be accurate and up to date. When the time comes, potential buyers or investors will ask hard questions and request the information that supports the value of the business. As they say, time is money – Investors and acquiring companies alike want the information to be available quickly and they want it right the first time. Being due diligence ready positions your company to have a more likely successful transaction.
Here are 10 ways to prepare your company for due diligence success:
ACCOUNTING CLEAN UP
Acquirers expect two to three years of financial information: balance sheets, statements of operation and statements of cash flow, with general ledger accounts reconciled. While audited financials may not be required, they will ease the concern of any buyer . Revenue recognition is often a significant issue, particularly if the acquirer is a public company. A private company may be more lax, whereas auditors for a public company will expect all aspects of this to be thoroughly addressed.
LENDER AND INVESTOR AGREEMENTS
Companies should maintain a current capitalization table, or schedule of all stockholders and holders of agreements that offer a right to purchase equity. This includes stock options, warrants, restricted stock, preferred stockholders, convertible note holders, or anyone that’s been promised equity in a written and signed agreement.
CUSTOMER CONTINGENT LIABILITIES
Compile obligations the company has entered into in the ordinary course of doing business. This includes product/service warranty terms, rebates/discount and rights of return. There are many nuances within that a buyer will consider for forecasting, contingencies, etc.
Sellers should disclose any legal contract still in effect. This often becomes a fire drill that can be avoided by maintaining a contract database. Many contracts have change of control requirements, termination clauses in case of control change, etc. There may also be commitments for product upgrades, etc. that are notable. Active non-disclosure agreements or confidentiality agreements should also be housed here. And make sure all contracts have been signed by all parties to the agreement.
Company formation documents must be presented to potential buyers. Organizations should structure their legal entity in a manner to anticipate a transaction. Sloppy governance documents often scare potential buyers, so maintain a disciplined approach around all governance meetings (board, committees, etc.) with a schedule following corporate document requirements and documented minutes.
Is the company’s intellectual property protected? Any proprietary IP will increase the value of a business but can diminish the value if the company doesn’t properly protect it. Also, the company should have a full understanding of outstanding litigation and claims by third parties. Acquirers may use contingent liability scenarios to require an escrow of a portion of the sales proceeds until uncertainty of these issues is fully resolved.
Companies should be diligent about keeping HR in compliance with the myriad of related rules and regulations. Maintain a master employee database that includes all current and historical employees, along with agreements that are signed by all parties, including clearly defined terms regarding intellectual property ownership. Additionally, maintaining the appropriate classification of employee status (contractor vs. W-2) is critical.
Companies should have stringent IT policies and procedures around document retention, disaster recovery and other IT infrastructure systems. This will demonstrate that the business has been careful about system access and loss of trade secrets and company data.
Once ready to “go on the market,” sellers should set up a virtual data room so potential buyers can access all the important information. This also enables the seller to track who is accessing which information for how long, etc. There are several options to use such as Drop Box, plus there are services that set up secure data rooms especially for acquisitions.
Management who employ good business practices will increase the value of their businesses in the long run. So always be prepared.
HOW WE CAN HELP
While we always want to be due diligence ready, its hard to expect any business owner -no matter how strong their cautionary measures- to dedicate themselves to ensuring company information is regularly up to date and accurate. In fact, with changing laws, regulations, financials, etc., all impacting your business, regulatory commitment becomes a full time job in itself!
This is why we encourage business owners to seek the guidance of an outside professional, someone who works with your vision of success in mind.
Here at MCDA CCG, we do just that, working with our clients throughout any stage of their due diligence process, whether you are starting from scratch, in the phases of reorganization, or you are just looking for a second opinion regarding your information, our team of skilled experts can provide the objective guidance you need.
Furthermore, we can provide a deeper look into the working operations of your business, assessing any weaknesses lying in you HR division, accounting department, and/or general management, and implementing progressive strategies to equip you with the confidence you need to quickly respond in a transactional situation.
See how we can assist you, by contacting one of our professionals here at our office headquarters in Placentia, Orange County, California, today! There is no obligation and the cost is free.