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Financial Due Diligence – The Devil is in the Details Ten Tips For Readiness

Verge presentation 2011-03-18

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Page 1: Verge presentation 2011-03-18

Financial Due Diligence – The Devil is in the Details

Ten Tips For Readiness

Page 2: Verge presentation 2011-03-18

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

Page 3: Verge presentation 2011-03-18

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

Page 4: Verge presentation 2011-03-18

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?

Page 5: Verge presentation 2011-03-18

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

Page 6: Verge presentation 2011-03-18

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?

Page 7: Verge presentation 2011-03-18

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

Page 8: Verge presentation 2011-03-18

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

Page 9: Verge presentation 2011-03-18

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

Page 10: Verge presentation 2011-03-18

9) Know the holes in your business • Be prepared to address:

– Single customer risk– Inconsistent financial results– Profitability/margin compression

• No surprises

Page 11: Verge presentation 2011-03-18

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

Page 12: Verge presentation 2011-03-18

Thank you.