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Due diligence for startups

Advice for buyers and sellers of start-ups to help with the due diligence process

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Due diligence for startups

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  1. https://www.flickr.com/photos/paurian/ Start-up DUE DILIGENCE a practical guide for after term sheets

  2. This deck hopes to scope out the process of due diligence for 1st-time buyers & sellers in a start-up acquisition

  3. This is not legal advice

  4. I’m not a lawyer

  5. And yes. If you are selling or buying a company, you should get a lawyer.

  6. Also… though I have been a seller, I am writing this as a buyer

  7. So sellers, be aware of my biases as you read this

  8. With that said, let’s go!

  9. BIG IDEA 1 MIND SET MATTERS

  10. Due Diligence is not an us-versus-them activity

  11. DO NOT 1) Approach it as an opportunity to catch someone lying 2) Tell little white lies

  12. You are conducting an external audit, but you are not doing it as enemies

  13. This is the first project between partners

  14. partners that need a positive, trusting working relationship throughout the execution of the acquisition and for many months or years after

  15. So, your mindset, attitude, and words matter They determine what you will see and how others will see you

  16. The focus should be on collaboratively validating the business value of the acquisition

  17. And by business value, I mean the synergy value. Not just the value of the selling business on its own.

  18. PS: Don’t rely on the Warranties Agreement to ensure that the deal is driven with ethics Just be ethical and positive

  19. BIG IDEA 2 COMMUNICATE AGGRESSIVELY

  20. The people performing the due diligence may be different from the ones doing the deal

  21. For example the buyer may appoint a lawyer or an accounting firm, and the seller may appoint a business management team or an outsourced accountant

  22. Whatever the case, much of the work will not be CEO to CEO

  23. So CEOs must ensure that the project team is driven by the business value of the deal, or they will investigate the wrong things

  24. And this means communication at the start and throughout the process CEOs are not allowed to disengage just because it is detail

  25. At the same time, it can be useful to keep the deal makers at arms length as we don’t want them spoiling relationship as we iron out the tough bits

  26. Also, don’t allow a due diligence to get sidetracked on aspects of the review that have no real impact on the value of the deal

  27. For example, if the valuation is primarily about IP that will eventually be driven through the buyer’s distribution network rather than the seller’s, other than making sure that there are no legal or debt-related skeletons in the closet, I wouldn’t go too deeply into the seller’s distribution network. It’s going to be deprecated anyway, so it doesn’t matter in the big picture. Instead, I’d focus on validating the IP and making sure the buyer’s distribution network will be able to integrate the new IP seamlessly.

  28. Finally, because the buyer’s team is likely to do interviews, the Seller’s CEO should ensure that everyone in the company, from CXOs to interns, are clear on the business plan, culture, processes, etc.

  29. Scripted answers, bad Single story driving a clear vision, good

  30. That said, you should already have strategic clarity in place regardless of an acquisition!

  31. BIG IDEA 3 MAKE IT THOROUGH, BUT DON’T LET IT DRAG

  32. How long should due diligence take?

  33. I think between 6 weeks – 3 months

  34. If it take longer than 3 months, the process may scuttle the deal

  35. Either the management team will be distracted from running the businessand the numbers will free fall

  36. or the buyer will find something more sexy (or get bored) – typical CEO!

  37. Shorter than 6 weeks feels too cursory to me to deliver quality

  38. The following schedule makes sense to me

  39. WEEK 1 Understand high level business, deal terms, and deal valuation (employee, management, and client interviews, market research, competitive analysis)

  40. WEEK 2 Decide as a team what needs to be reviewed, and develop a due diligence project plan (hold workshops to do this with explicit action plans tied to specific people)

  41. WEEK 3 – 4 Management team collects collateral

  42. WEEK 5 – X Execute Due Diligence

  43. WEEK X+1 Prepare due diligence report with executive team

  44. WEEK X+2 Present report to deal team and discuss results and operational next steps

  45. BIG IDEA 4 BEWARE OF DUE DILIGENCE FORMULAS & CHECKLISTS (like this one)

  46. Like all business processes, recipes only get you so far

  47. Before anything else ask, "Why am I conducting due diligence?"

  48. You've got to be very clear about the deal termsthat you are validating?

  49. If you are buying customers, but you won't really leverage IP, then spend more time on client due diligence

  50. Firms merge for synergy value

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