Preliminary Due Diligence and Valuation
Preliminary Due Diligence and Valuation
Many preparations should be completed by business owners and their sell-side advisory firm before the official transaction process begins. These preparations include Preliminary Due Diligence and a Benchmark Valuation. Completing these is imperative to ensuring a successful transaction. The following list breaks down the Preliminary Due Diligence and Benchmark Valuation and is intended to educate business owners on the key processes that should be executed by their sell-side advisory firm prior to starting the transaction process.
Preliminary Scoping: After confidentiality has been established between the business owner and advisory firm, the business owner should disclose any and all attributes of their business that may potentially impact the valuation of the business. This includes any current or impending lawsuits, key employees considering leaving or near retirement, negative company culture issues, inefficient processes or any other factors that may impact future performance. It is imperative that any ‘skeletons in the closest’ are made aware of as soon as possible, as any surprise during the official due diligence process could jeopardize the transaction itself.
Preliminary Documentation: Business owners should put significant effort into ensuring that all financial performance-related documentation, including historical financial statements, historical tax statements, forecasts, budgets, projections, and any other financial information and reports are easily accessible. They must be readily available should they be required during a future due diligence process. During a transaction, poor record management and documentation can significantly hinder the pace of closing the transaction and can even damage the valuation of the company.
Preliminary Company Overview: Business owners should also ensure that important information regarding the operation of the business is easily accessible. These documents and informational materials may include organizational charts, business processes, historical and future growth strategies, historical and future market dynamic studies, and others. These documents can significantly help prospective buyers reach important conclusions during the due diligence process that would otherwise need to be heavily researched.
Valuation: The sell-side advisor and their valuation team complete a detailed financial valuation analysis on the company. This process is extremely complex, as many factors can determine the value of a business. These factors may include: Goodwill, historical and projected financial performance, lease rights and obligations, future industry growth, and the current state of the M&A market. The sheer number and complexity of factors that impact the valuation of a business is why it is so important for business owners to consult with a professional sell side advisory firm that is familiar with valuation, potential acquirers and the M&A landscape.
