Preparing for the Next Transaction

More than half of transactions that make it to a letter of intent fall apart during due diligence. There are many more that involve price-reductions or drawn out timeframes that can slow down transaction momentum and draw the leadership’s attention away from strategic opportunities. The next stage in your company’s strategic growth could involve additional capital in the form of a larger investment, growth equity, or an exit but no matter the direction, due diligence will be more rigorous with each successive round of financing.

Over the years, we’ve seen transactions delayed or canceled for preventable reasons like an investor’s confidence in the company’s technology, IP, legal liability, accounting treatment and tax matters. An investor’s confidence can significantly impact the pricing and timing of the deal. By preparing and strategically planning in advance for the diligence process, you can reduce the probability of wasted due diligence and transaction failure. We have seen many companies that have best-in-class business solutions become pummeled by professional investors. Such investors require documentation of every component of financial and operational performance during the pre-investment due diligence and the more rigorously you prepare these documents, the more you increase your likelihood of transaction success.

The following types of documentation should be retained and organized to prepare for the diligence process:

• Financial Records – Income statements, balance sheets, tax returns, budgets/financial projections and financing agreements.
• Contracts – Proposals, monthly/quarterly internal performance reporting, executed versions of contracts, amendments/change orders, documentation/correspondence regarding contract performance, quarterly pipeline reports, referrals, leases, material purchase orders, service agreements and informal or off the books arrangements.
• Employees – Resumes, applications, employment agreements, background checks, clearance, education, annual reviews, changes in compensation and organizational charts.
• HR – Employee handbooks, internal policies and procedures, employment issues, accusations, threatened litigation, or tips from hotline.
• Legal – Pending, ongoing, or completed litigation (customers, vendors, shareholders, employees, government investigations, or any other legal issues that may come up during the diligence process).
• Intellectual Property – Documentation of patents, trademarks and agreements with third-parties to utilize intellectual property that is not owned internally. You may also be required to include an exhaustive list of the third-party components that are a part of your software, including free and open source components.
• Technology – Description of technology, architectural charts, scalability and performance indicators, product design documents, architectural descriptions, security vulnerability scans and penetration tests.

There are resources like MS SharePoint or other online data sites that can assist in the organization and maintenance of documentation. If you don’t have the internal resources or bandwidth to organize and retain documentation, set up an arrangement with a professional custodian – accountants or attorneys –  where you send documents contemporaneously and they maintain a repository either in an online data room, or on secured servers.

One of the first steps in the due diligence process will be to review the financial and operational documentation. The response to the request for this information will impact the investor’s confidence and ultimately your company’s value. The capital raise may be several years away, but if you could talk to your future self, the advice you would likely heed is to start early and get organized.

Got questions? Connect with an experienced Aprio advisor today. 
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