financial due diligence: ten tips from verge advisors

FINANCIAL DUE DILIGENCE:�THE DEVIL IS IN THE DETAILS

TEN TIPS FOR READINESS

FINANCE FUNDAMENTALS

FIRST, A QUICK INTRO ON US… We provide part-time CFO and accounting services for growing businesses. We blend strategic thinking with tactical execution in the finance function to help you drive better decision-making and accountability in your business, so you can get to your next milestone. Our firm was founded in 2005, and we are located at the heart of business growth and innovation in Kendall Square in Cambridge, MA. We are Verge Advisors.

HELLO…WE’RE HERE TO HELP

1•  Begin storing everything electronically now in an ongoing and comprehensive way

•  For startups with fundraising rounds – try keep the fundraising documents and build upon them

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CREATE A DATA ROOM


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“BUTTON-UP” THE IMPORTANT STUFF

•  Is it IP? –  Ask your IP attorneys for a summary of all

patents and the upcoming activities •  Is it B2B?

–  Make sure all major customers have current signed contracts

•  Is it consumer/web-based –  Have key metrics for the business


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KNOW YOUR UNIT COSTS

•  What are your gross and net margins? •  What costs are variable? •  What is the proper time horizon to look

at customer profitability?


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KNOW WHO HAS A �“CHANGE OF CONTROL” PROVISION

•  Know who has them and whether you have good relationship with that vendor/customer. You may need to get them to waive this

•  Check your leases and joint ventures as well as customer and vendor contracts


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PRIORITIZE COMPLIANCE

•  Are all income taxes and annual reports filed? Are you treating sales and other taxes properly in all states?

•  Are all employee files in good working order? Have raises and comp plans been signed off on properly?

•  Is your cap table current? Do you have board minutes?


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DOCUMENT HOW YOU RECOGNIZE REVENUE

•  Know the regulations that support your treatment

•  Put together a 1 page document summarizing how you recognize revenue, including any exceptions and why those exceptions are permissible


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HAVE GAAP FINANCIALS OR �KNOW WHAT IS NON-GAAP

•  You may have to represent that the financials are prepared on a GAAP basis

•  If there are exceptions, know and justify why you are departing from GAAP

•  Know the implications of changing to GAAP compliant financials


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PRESENT A FORECAST YOU �EXPECT TO DELIVERY ON

•  This is not a fundraise, so be prepared to put forth a plan that the team will deliver on

•  The deal process may take longer than you think so measuring forecast vs. actual may become a factor

•  Exceeding forecasts is one of the best ways to give the purchaser comfort


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KNOW THE HOLES IN YOUR BUSINESS

•  Be prepared to address: –  Single customer risk –  Inconsistent financial results –  Profitability/margin compression

•  No surprises


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KEEP RUNNING YOUR BUSINESS

•  Deals sometimes take longer or do not close for reasons completely out of your control

•  Keep running and managing the business through the entire close process


financial due diligence: ten tips from verge advisors

Economy & Finance