verge presentation 2011-03-18

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

Thank you.