verge presentation 2011-03-18
TRANSCRIPT
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Financial Due Diligence – The Devil is in the Details
Ten Tips For Readiness
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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
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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
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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?
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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
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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?
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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
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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
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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
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9) 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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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
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Thank you.