october 23, 2015 setting the stage: financial due diligence to boost credibility and deal value

October 23, 2015

Setting the Stage: Financial Due Diligence to Boost Credibility and Deal Value

Presenter(s)

| Copyright 2015 . MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

Christine Schneider, CPAPartnerMFA – Moody, Famiglietti & Andronico(978) [email protected]

Robert Busch, CPAPartnerMFA – Moody, Famiglietti & Andronico(978) [email protected]

mailto:[email protected]

mailto:[email protected]

About MFA – Moody, Famiglietti & Andronico

Proactive CPA and consulting firm with national and global reach

Founded in 1982

Over 100 professionals, including 17 partners

Located in Tewksbury, Massachusetts


About MFA – Moody, Famiglietti & Andronico

MFA Cornerstone Consulting: Performance & Controls, IT Advisory, Valuation, and Litigation Support Practices

New Wealth Advisors: An independent, SEC-registered investment advisor with two distinct practice areas: Investment Management and Retirement Plan Advisory.

Strategic Talent specializes the recruitment and placement of a broad range of highly skilled Finance and IT professionals.

MFA Capital Advisors is a business consulting and transactional services firm that encompasses mergers and acquisitions, reorganizations, recapitalizations, stock repurchases, capital raising, bank financing, strategic alternatives and general corporate advisory on related matters.


Sources of Capital

Private Equity Investment– Equity-based/Convertible Debt

Venture Capital– Equity- based – Preferred Stock and/or

Convertible Debt Investment Banks (IPO) Established Life Science Companies

– Royalty- Based Financing– Licensing/Co-Development Agreements


What is the Goal of Financial Due Diligence?

Review historical financial activity– Targeted testing of certain areas

Gain understanding of policies, procedures and controls

Assess finance and accounting team Make assessment of future financial

needs and risks Gain comfort with forecasts and

projections


Be the Exception

It is all about mitigating risk and building credibility.


Get Your “Financial House” in Order

Qualified individuals on your accounting/finance team

Solid historical accounting records– Establish consistent, accurate financial

reporting practices TTM – Trailing 12 months very important


Get Your “Financial House” in Order

Establish a data room– Store all vital documents in one place– Design the data room based on a due diligence checklist

Establish controls, policies and procedures– Access to cash, signing authority– Access to accounting systems and electronic records– Financial reporting oversight


Common Financial Diligence Issues


Accounting for Intangible Assets– Software Development Cost– Organizational Costs– Owner’s Goodwill

Inventory management– Physical Counts– Excess and Obsolete Reserves– Overhead Rate Calculations

The Devil is in the Details……



Accruals/Cutoff of Accounts Payable– “Modified cash basis” not acceptable– Best practice is to address throughout the

year; not just at year end– Accrued vacation

Missed Sales Tax Collections/Filings– Buyers/Investors take conservation approach

to affecting deal price when it comes to these issues



Capitalization Table– Must be organized and complete – Who is responsible for maintenance?– Need to understand your capitalization table pre- and

post-deal Stock Options Plans

– 409A compliant?– Typically need a valuation

Revenue Recognition– Misapplied GAAP can have significant impact on revenue– Revenue contracts can be complex to account for



Contractor vs. Employee– Strict MA rules – Active IRS audit area

Missed Foreign Activity Filings– Forms 5471 and 5472; informational but big penalties– Foreign bank accounts (FBAR); if >$10k at any point during the

year

Taking a Look from an Outsider’s Perspective


Pre-revenue:– Burn rate (monthly expenses)– Anticipated market demand for

product– Pricing models– Competing technologies– Cost of R&D required– Working Capital needs– Capex

Revenue –generating:– Quality of earnings review– Evaluating customer

concentrations– Analyze gross margins from

multiple viewpoints– Understand trends– Customer attrition– Executive Compensation– Complexity of CAP TABLE

Taking a Look from an Outsider’s Perspective

Qualified preparer of forecasts and projections– Accountant vs. Financial Analyst

Projections/Forecast based on solid historical information– Understand your assumption and “Drivers”– Based in “reality”

Understand how your company could be potentially valued as a starting point – EBITDA multiple– Revenue multiple– Normalized EBITDA– Projected EBITDA– Free Cash Flows


Financial Due Diligence - Why so important?

How can common findings affect your deal?

May cause re-pricing of the transaction Stall the transaction Affect representations, warranties and

indemnification limits Can BLOW UP the deal!!


Financial Due Diligence

Questions?


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october 23, 2015 setting the stage: financial due diligence to boost credibility and deal value

Documents

famiglietti andronico978

cpapartnermfa moody

mfa capital advisors

financial house

rights reservedaccounting

goal of financial

projections page

important page