As B2World advises many emerging companies seeking an exit down the line, the common question of “how do we get the highest value for our company” regularly arises. Further, if this question isn’t asked, we raise the issue as one of critical importance.
So, the question remains. How are optimal valuations achieved in acquisitions? As opposed to answering this question from the perspective of how to select among a broad range of business models, we will instead address various issues that must be managed in order to not only survive but thrive during a potential acquirer’s due diligence of your company—regardless of the type of business being conducted.
As such, it is imperative to understand the due diligence process. This process is akin to a situation where a buyer of a significant asset (e.g. a yacht, luxury automobile, house, etc.) hires a third party to inspect and appraise the asset in order to determine whether the asset meets defined criteria for purchase, whether any defects need to be cured before or after purchase, outstanding risks, and the appraised price.
With a business, however, there are a broad range of issues to explore that range from tangible (e.g. physical assets) to the intangible (e.g. intellectual property rights).
In light of this, we typically advise our clients to have a “due diligence checklist” in place at the company which delineates the issues to be raised during the due diligence process. Further, the company should create procedures and an internal infrastructure to ensure of ongoing compliance with the checklist.
Issues typically covered in a due diligence process can include:
1. Corporate Issues such as:
- Corporate form
- Headquarters and affiliates
- Owners (i.e. shareholders)
- Shareholder agreements
- Type of shares
- Voting agreements
- Records of shareholder meetings
- Records of board meetings
- Individuals with signatory authority
2. Finance Issues:
- Bank accounts
- Balance sheets
- Tax returns
- Accounts receivable
3. Agreements and Transactions:
- Acquisition agreements
- Supplier contracts
- Partner agreements
- Customer categories and agreements
- Lease agreements
- Agreements affected by an acquisition
- Agreements between company executives or board members and the company
4. Intellectual Property:
- Trademarks and registrations
- Patents and registrations
- Trade secrets and know how
- Copyrights and registrations
- License agreements
- Open source
- Type of insurance
- Existing claims
- Amount of coverage
6. Employee Issues:
- Types of employees
- Number of employees
- Standard employment terms
- Duties of confidentiality and assignments of intellectual property
- Termination rights and obligations
- Incentive programs
- Bonuses tied to company sale
7. Litigation, Demands, and Claims:
- Existing lawsuits with other parties (customers, partners, suppliers, authorities, third parties)
- Letters from competent legal counsel including legal opinions about the status and probable outcomes of such legal actions.
Based on the type of business run by your company, different issues can have greater weight in calculating a company valuation. Further, each of the points listed above can have a number of sub-issues depending upon how granular a potential acquirer would like to probe.
Feel free to Contact Us to learn more about how we can help you. For instance, we can equip your company with a full due diligence checklist including guidelines for compliance, we can conduct a pre- due diligence in order to identify and help your company correct any deficiencies prior to the time when it will actually cost you money—i.e. when a potential acquirer conducts its own due diligence, or we can help your company prepare for and/or conduct a due diligence in connection with a target that your company desires to acquire.
Note that due diligences are not restricted to scenarios where an acquirer aims to purchase a company but can similarly apply to situations when one company desires to buy one or more assets from a target company.
We wish your company the best of luck in being acquired and/or acquiring businesses in the future!
*This article is not legal advice and is provided for general information purposes only.