Jonathan Iannacone: Financial Due Diligence and Your Exit - The Devil is in the DetailsPresentation Transcript
Financial Due Diligence – The Devil is in the Details Ten Tips For Readiness
1) Create a Data Room 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
2) 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
3) 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?
4) 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
5) 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?
6) 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
7) 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
8) 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
9) Know the holes in your business Be prepared to address: Single customer risk Inconsistent financial results Profitability/margin compression No surprises
10) 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