Thinking of Selling your Start-Up? Are You Ready for Financial Due Diligence?

Entrepreneurial spirit is in the DNA of Proseso. We are proud to advise great leaders thriving on building and creating solutions for a better world. 

The entrepreneurial journey of a Startup is full of uncertainty and being able to adapt to fast-changing situations is essential. Selling your company (or part of it) and finding new investors may be part of your journey and it is important to anticipate and be prepared. 

In this blog article, we want to put some light on a key process of selling your company which is the Financial Due Diligence. We also want to give some tips on how to make sure this process goes smoothly. This is important because from experience a lot of deals fail or are poorly negotiated because of failure to show strong internal controls and reliable financial data during the Financial Due Diligence.

What is Due Diligence Process?

Due diligence is the process of verifying all facts about a possible investment. Examining all legal and financial documents, prior firm performance, and anything else deemed relevant to the transaction. 

In the same way a company or venture capital firm will perform due diligence before deciding on investing in a target company or not, individual investors are encouraged to do due diligence on their possible investments as well whether this is to invest in stocks, a crypto-project or a house.

Every investment has a different amount of risk, and without proper due diligence, these risks are not properly considered. The methodical approach of the due diligence ensures that the buyer and the seller are on the same page while making a transaction.

Legal Due Diligence

The legal due diligence involves collecting and assessing legal documents and information of the target company. This usually consists of a review of the contracts (with customers, suppliers, employees, etc.), the current or potential lawsuits, the tax liabilities, the company by-laws, the stockholder agreements, etc.

The goal of the Legal Due Diligence is to uncover all relevant information and potential legal risks and liabilities.

Financial Due Diligence

A Financial Due Diligence is an in-depth analysis of the target company’s financial records. This includes the review of materials and documents like Income Statements, Balance Sheets, Statements of Cash Flows, Growth trends, Short and Long-term Debts, etc.

The main objective of the Financial Due Diligence is to make sure that the target company’s financial data are accurate, that the internal controls are strong, and ultimately that the company is bought at a fair price. 

When is the Good Time to Sell your Company (or Find New Investors)?

Some entrepreneurs start their businesses without an exit strategy. Their main focus is to build a long-term profitable business. On the other hand - and this is particularly true in the tech startups ecosystem - the main goal of some entrepreneurs is to grow a business that will interest investors and sell it as soon as they can.

Selling a company or looking for new investors depends on a lot of factors including the industry, the country, the management’s vision, long-term goals, etc. 

According to a Forbes article entitled "4 Ways To Know That It's Time To Sell Your Business" there are a few interesting indications that you can consider to selling your company:

  • Your Heart Isn’t With the Company Anymore

  • You’ve Been Getting Some Serious Offers

  • Your Other Ventures Are Taking up More Time

  • Your Market May Shift Unfavorably in the Future

At the end of the day, it is important to be open to change and be opportunistic. Your initial business model and vision may have to be adjusted for your business to thrive. 

If your company needs new investors or needs to be sold to go to the next level - or to simply survive - then the best decision is to go for it. On the other hand, some companies - including family businesses for example - will rely on their stable ownership and long-term vision to build great ventures without requiring any external investors.

Proseso Consulting Financial Due Diligence

Increase your Company's Value with strong Financial Processes!

The Financial Due Diligence process ends with the Consultant issuing a report which gives a review of the accuracy of the financial data presented and an analysis of the company’s actual performance and financial state. If the Seller comes prepared and has accurate financial data, the report will not have significant findings and the deal has more chances to push through. 

Generally speaking, companies with strong financial processes have a competitive advantage and higher value and goodwill over companies with poor controls. Goodwill represents the additional price that the buyer is willing to pay on top of the sum of the net fair value of all of the assets purchased.

This is the case because with strong financial processes and controls the company can: make data-driven Business Decisions thanks to a clear understanding of its costs and margin; reduce its Fraud Risk; make accurate Projections and properly plan Investments and Funding; etc.

Here are some tips on how you can upgrade your financial processes:

  1. Implement clear Financial Policies and Procedures

  1. Set-up a Cloud-based Accounting Software or ERP (enterprise resource planning)

  1. Outsource technical and time-consuming activities to professionals like accounting, payroll or tax. Check out our previous article on Outsourced Accounting here.

  2. Upgrade your Financial Reports. Check out our previous article on Financial Reporting here.

How Can Proseso Help You with Financial Due Dilligence? 

Whether you are an investor looking to get a Financial Due Diligence report on a target company (buy-side), or a startup looking to prepare for a Due Diligence (sell-side), our team of experienced accountants and finance consultants can help you with your requirements as part of our Financial & Advisory services

Our services will rely on an in-depth analysis of the company’s financial concerns and risks. 

Here are some of the items we will be looking into:

  1. Business Operations such as Customer Analysis, Business Model, Service Categories, etc.

  1. Accounts Receivables and Revenue Verification and Analysis

  1. Cost and Margin Review

  1. Inventory of Fixed Assets

  1. In-depth review of Financial Statements, including Income statements and Balance Sheet

  1. Risk management Studies through investigation of Assets and Liabilities.  

Contact us today to see how we can help you with your Financial Due Diligence and Accounting and Financial requirements in general. 

This blog article does not constitute professional or legal advice. It is only intended to provide general information on a subject.

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