August 30, 2023

Corporate Finance: Value Creation – Today and On Sale

The term ‘due diligence’ or DD, as it is often shortened to (somewhat ironic for a process that is rarely short), often strikes fear into business owners and management teams alike. Having hordes of external advisors combing through details of what feels like every transaction a company has ever made, looking for errors, can be disruptive, time-consuming and detrimental to the value of the business.

However, when you strip the DD process down to its fundamentals, you see that it is nothing more than a confirmatory check that the core elements underpinning current and future trading are sound.

Ask any member of a management team or board of virtually any company whether the fundamentals of the business are sound, and a polite 'yes' is probably the response you'll get. So why then are businesses often worried about DD, which frequently leads to renegotiations or worse?

Some readers will be part of a management team or board, and this article hopefully provokes some thoughtful reflection. If this is you, consider asking yourself these questions:

  • First, are all of our employee, customer and supplier agreements signed, can we locate them, and do they accurately reflect the commercial arrangement? Proper record keeping and order are imperative not just for DD, but for the effective day-to-day operations of any well-run business.
  • Second, do we have an up-to-date business plan that lays out strategy, explains why we think it will work and how success will be measured? A business plan is more than just a document for seeking investor funding - it is a living document that guides the direction of the company.
  • Third, do we have sufficiently detailed financial forecasts that connect to the business plan by showing the key assumptions underlying revenue and costs? Forecasts should tell the story of how the strategic vision in the business plan translates to financials.
  • Fourth, can we easily track historic financial performance to understand how we delivered on, or missed, previous forecasts? Understanding variances between projections and actuals is key to sharpening future forecasts.

This list is not meant to be exhaustive, but the common theme is this: wouldn't any business be better served by being able to confidently answer 'yes' to questions like these at every board or management meeting?

Too often, meetings get bogged down in specific, minor issues under the assumption that foundations are solid. Consideration of more fundamental questions should be part of every meeting agenda.

Better business decisions underpinned by value creation and a smooth due diligence process that confirms your valuation are the likely outcomes. In reality, much of what some view as 'preparation for sale' may just be good business hygiene.

The DD process and deal negotiations will always entail some level of disruption for a business. However, companies that invest time into developing a thoughtful strategy, keeping organised records, and monitoring performance relative to projections will find themselves on solid ground when DD commences.

And there is no time like today to get your house in order.

For more information, contact:

Christian Roelofs, CEO, Finativ

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