How to Do Due Diligence Before a Company Sale

Sellers of a business need to do a lot to prepare for the sale. Along with looking for the right buyer, they should begin planning for the due diligence process well before they list the business for sale. This can help make sure they’re prepared once they do find a buyer, as everything can move quickly after that point. Failing to be prepared slows down the entire process and can mean the loss of a sale. So, how does a seller prepare for the due diligence process?

What is Due Diligence and Why is it Important?

Due diligence is the process in which the buyer and seller review all information about the business to determine if the buyer thinks it’s something they should purchase. Both buyers and sellers can request information from each other and can review the information to determine if the sale should move forward. Most information, however, will be requested by the buyer as they need to ensure they are purchasing the right business for their interests. It is somewhat like purchasing a used vehicle, where the buyer will have a mechanic do a thorough inspection before the purchase to minimize the potential for expensive surprises.

two guys shaking handyThe due diligence process can have a huge impact on whether the sale goes through and how much the business sells for. When a seller is preparing for the due diligence process, they will go through every part of their business carefully to ensure everything is ready. If they find any potential issues, such as liens that have not been removed or key contracts that have not been executed yet, they can fix these issues before the buyer discovers them. This ensures everything is ready to go when the business is listed for sale and minimizes things the buyer might notice that could lead them to request a lower purchase price for the business.

How Due Diligence Works

The due diligence process is done after the buyer shows interest in purchasing the business, but before the purchase is complete. During this time, the buyer will request information from the seller so they can evaluate the value of the business and determine if it’s the right business to purchase. The documents requested can vary depending on the type of business and the buyer, but the seller should have as much as possible prepared in advance to speed up this part of the buying process. Once the due diligence is done, the buyer may adjust the amount they’re willing to pay for the business or adjust some of the terms of the sale based on what they found during the due diligence process.

Preparing for the Due Diligence Process

Sellers, as noted, should begin preparing for the due diligence process before they list the business for sale. This allows them to minimize any potential issues that could impact the sale of the business. To prepare, sellers should gather all of the documents they believe will be requested or needed during due diligence and ensure they’re organized and ready for the buyer to review. The exact documents needed can vary, depending on the type of business and what the buyer wants to know, but there are standard components that the seller can begin going through to prepare for the sale.

The seller should also take this time to find the professionals they will want to work with through the due diligence process so they can have assistance with obtaining and sharing any necessary documents. This allows them to have the assistance they need through the process, so they don’t have to handle it on their own. When they have the right help, they can continue focusing on managing the business, so there are no issues because of the due diligence process.

General Categories for Due Diligence

Though the seller cannot predict everything the buyer will want to review, they can start organizing information that the buyer is likely going to need during the due diligence process. There are several categories that the seller should look into and gather any documents for. These categories include the following.

·         Organization and Operations – The buyer will need to know how the business is organized. This includes formation documents, board minutes, any equity agreements, ledgers, and other information that shows the structure and organization for the business.

·         Financial Records – Buyers need all financial information for the business, including balance sheets, income statements, audit reports, and tax documents.

·         Any Contracts – Any contracts that will still be in force after the sale should be shared with the buyer. This could include customer contracts, vendor contracts, loans or other financial contracts, and employee contracts.

·         Litigation or Regulations – Any permits obtained by the company as well as pleadings for pending litigation or notices of threatened litigation should be shown to the buyer during due diligence.

·         Employment Information – Buyers will need information about current employees, including their wages, benefit plans, bonuses, and any benefit policies that may be in effect.

·         Any Intellectual Property – Information about intellectual property owned by the business, including copyrights, trademarks, or patents, should be shared with the buyer.

·         Marketing Information – Buyers should be able to review current marketing information to help them determine how marketing is currently being done and what they might want to start if they purchase the business.

Common Documents Requested by Buyer

Though the buyer can request just about any documents they may need to decide to buy the business, there are standard documents that they will request. When the seller is getting everything ready, they may want to make sure they have the following documents prepared.

·         Financial Statements – Buyers will want full access to financial statements to make sure they understand how the business has performed previously, how it is performing now, and how it may perform in the future. They’ll look for anything that seems out of place or unusual.

·         Any Accounts Receivable – Potential buyers will want to look for accounts that are more than a few months old, any write-offs they may need to worry about, and check for potential allowances for bad debts that might be their responsibility if they purchase the business.

·         Current Inventory and Inventory History – The buyers will want to see the current inventory for the business as well as look into how quickly the inventory typically moves. They’ll want to see what the typical turnover rate is as well as look into the pricing practices for the business and any depreciation methods used.

·         Any Contracts and Licenses – Any contracts will need to be reviewed by the buyer as well as leases, vendor agreements, and any agreements with consumers. They will also want to look at any permits or licenses the business holds to make sure everything is legally operating.

·         Full Tax Returns for Prior Years – Buyers will want to check out whether there are any net operating losses for the business or other tax implications that they will need to be worried about if they take over the business.

Due Diligence for the Seller

Report der Financial Due DiligenceMost of the due diligence is for the buyer to make sure they are getting a good deal on the business and purchasing a business that’s right for them, there is due diligence for the seller as well. They should take this time to do their research so they can make sure they have found the right buyer for the business. They may want to look into the visions the buyer has for the company to ensure it matches their own or check to make sure the business is going to continue to grow and be profitable once it has sold. If the seller will be merging with the buyer instead of selling outright or will be owning stock in the company after it has sold, this information becomes crucial so they can ensure they will continue to bring in profits after the business has sold.

Common Documents Requested by Seller

During the due diligence stage, there are some documents commonly requested by sellers from the buyer. The seller should request these at the beginning of the due diligence process so they can ensure they receive all documents they need promptly and to allow for time to obtain other documents if they find they need further information before the sale.

·         Financial Statements – The seller will want assurance that the buyer is capable of purchasing the business. Financial statements from the buyer will show that the money is available for the purchase of the business.

·         Buyer’s Contracts – Sellers may want to check any contracts the buyer currently has to ensure nothing will be an issue after the sale and to make sure the contracts will not impede the purchase in any way.

·         Authorization for the Purchase – If the buyer needs to be authorized to make the purchase, the seller should ensure that the proper authorization has been obtained. Without this, the sale will not go through.

·         Authorizations to Sell Stocks – If the seller will be given stocks in the business as part of the sale, they need to make sure the buyer will have the authorization to provide them with the stocks. They should get this information during the due diligence process, so there are no surprises after the sale.

·         Other Documents – Depending on the details of the sale, there may be other documents the seller will need to look at during the due diligence stage. They should ensure they know what these documents are and be ready to request them during this process, so everything is available to them before the sale proceeds.

Preparing the Documents for the Buyer

During the due diligence period, the buyer will give the seller a list of the documents they need. At this point, the seller should take the time to prepare each of the documents for the seller to review. The seller needs to ensure everything is properly organized and that all documents are ready. The seller should already have several documents ready, as they should have the items listed here prepared in advance. They can then gather any information they did not already have ready and work on organizing the information so it can be presented to the buyer.

The seller will want to organize the information based on the request list for the buyer. This ensures they have everything and makes it easier for the buyer to find everything they’re looking for. It also makes it less likely that the buyer will request information they already have since the information is all organized in the order requested by the buyer.

How to Share Documents Securely

Many times, due diligence for a business sale is done by presenting physical copies of all documents. However, it can be expensive to produce physical copies of every document, and having all of the physical copies is not very secure. It also means the buyer needs to visit the office during business hours to be able to view the documents. Instead, documents can be shared securely through a virtual data room.

All of the documents needed during the due diligence process can be uploaded to the virtual data room so they can be accessed whenever it’s convenient for the buyer and the seller. The buyer is free to access the documents after business hours as well as in a location that’s convenient for them.  All documents are kept secure and only viewable by those who are authorized to view them, and the documents are fully indexed for convenience as well as easy to view without new software needing to be purchased or installed.

If you’re planning on selling your business, the due diligence process is crucial and needs to be handled carefully to avoid any potential issues. Make sure you have the documents here prepared so the buyer can start reviewing over them while you obtain any other necessary documents. If you’d like to make the due diligence process as smooth as possible, consider using a virtual data room that enables you to share documents with the buyer securely and conveniently.

Financial Report

What is Financial Reporting?

In just about any industry, financial reporting will be crucial. This is the disclosure of the business’s finances and related information and is usually given to management as well as stakeholders. The financial reporting covers how the business is performing, usually on a quarterly or annual basis. There is certain information that needs to be included in the financial reporting and various guidelines that should be followed when creating the report.

Why is Financial Reporting Important?

Financial reporting is required by just about every stakeholder, and there are multiple reasons why they might need it. Some of the reasons it may be important will include the following.

  • Required by regulations – Local regulations and statues may require companies to provide financial reporting on an annual or quarterly basis. In these cases, the financial reporting will need to be published so anyone can read it.
  • Helps During Audits – When the finances of a business need to be audited, a financial report is required. This allows the auditors to get a clear overview of the business’s finances. They may need to access prior financial reports, not just the most current one.
  • Assists with Financial Planning – The financial report provides an overview of the company’s finances that can be useful when making decisions. It can also show a clear pattern based on changes made when the past few financial reports are compared together.

Business Building

  • Used to Raise Capital – Businesses that need a loan or to raise capital via investors will need to provide the investors or the bank with their financial reports. This allows potential lenders or investors to do their due diligence before giving the company money.

What to Include in a Financial Report

A financial report is typically a very long document that includes a variety of information about the company’s finances. There are certain parts of the financial document that must be included, though other documents can be included as well. Some of the crucial documents to include are the following.

  • Statement of Financial Position – This part is an overview of the company’s finances at the end of the quarter or the year. It includes assets, liabilities, equity, and more.
  • Profit and Loss Report – This is a more detailed part that covers the income, expenses, and profits or losses for the period of time covered in the financial report. This should include any sales or expenses during that period of time.
  • Changes in Equity – This part covers the changes in equity for the company during the financial reporting time period. Any changes in equity need to be in this section.
  • Cash Flow Statement – This is a report covering where the money came from and went during the quarter or year. More detailed than the profits and loss report, this covers investments by the business, sources of cash, and any other ways money was brought into the business or used by the business.

Objectives of Financial Reporting

When creating a financial report, it’s a good idea to keep the objectives of the report in mind. It should be organized, so anyone who needs to view it can find the information they need quickly and easily. The following objectives should be considered when creating every financial report.

Stakeholders next to a financial report

  • Provide Management with Financial Information – Management for the company will use the financial report to plan, analyze previous changes made, and make decisions for going forward. They will need to be able to see an overview of the finances with respect to the decisions they’ll be making.
  • Provide Investors or Creditors with Financial Information – Any investors or creditors will want to review the financial reporting to ensure the business is still bringing in profits and able to meet any obligations. They may also review prior financial reports before offering financing to the business to ensure they will receive their money back.
  • Provide Stakeholders with Information – Stakeholders will want to make sure the business is operating as intended and that there are no major issues they should be aware of. Much of the information they’ll want to review is covered in the financial report.
  • Provide Auditors with Information – When the business needs to be audited, the financial report should assist the auditors in finding the information they need. This can help the audit proceed faster and minimize the potential for any issues.

Across industries, businesses need to make sure they create financial reports on a regular basis. These reports are used in a variety of ways, so it is critical they include everything that might be needed by the people who use it. This way, the financial report can become an asset the company can use for management, lenders, governmental regulations, and more to show how the company is doing throughout the quarter or year.

Symmetric photo of a building

A Guide to Vertical Acquisitions: Their Benefits, Risks, and Alternatives

Vertical and horizontal acquisitions are strategies that businesses use to solidify their positions, increase market share, and turn more profits. Read on to learn more about vertical acquisitions and their advantages over horizontal mergers.

Vertical Acquisitions: What Are They and How Do They Work?

Vertical acquisitions, mergers, and integrations are competitive strategies by which companies assume control over various stages of production and/or distribution. It’s covered in most major business courses, including MBA degrees. A great example of a vertical merger is that of Carnegie Steel, which didn’t just buy iron mines to ensure a plentiful supply of raw materials, but also purchased railroads to strengthen their distribution network. This all-encompassing strategy helped Andrew Carnegie make cheaper steel, and it boosted the company’s standing in the marketplace.

What is a Horizontal Merger?

A horizontal merger or acquisition is another strategy companies sometimes use. The simplest definition is that a horizontal acquisition is the purchase of a related business. For instance, a fast food chain may merge with a company in a different country to gain access to foreign markets.

Vertical Acquisition Strategies

As we’ve seen here, vertical mergers combine companies with their suppliers (backward integration), or with their distributors (forward integration). For instance, supermarkets may buy farms to ensure a steady supply of fresh produce, or they may buy a fleet of vehicles to make it easier to get those products to market. There’s another type of vertical merger, known as balanced integration, which is an even mix of these two methods.

When is a Vertical Acquisition a Good Idea?

Multiple factors affect the decisions that go into forward and backward integration. Companies may use such strategies in these scenarios:

  • When their current suppliers or distributors are unreliable
  • If raw material prices are unstable or distributors’ fees are high
  • When distributors and suppliers earn sizable margins
  • If the company has the ability and resources to manage the supplier’s or distributor’s business
  • When the industry is entering the growth phase

The Benefits of Vertical Acquisitions

What are the biggest advantages of a vertical merger? Allow us to use the example of an automobile manufacturer.

With a vertical acquisition, the car-maker can smooth out its supply chain, make its service and distribution networks more efficient, and absorb profits that would have otherwise gone to parts suppliers and other entities. The automaker would, by assuming control of its supply and distribution networks, raise entry barriers for other companies while developing its own core competencies.

The Drawbacks of Vertical Mergers

Though vertical acquisitions are advantageous in most cases, there are some pitfalls to consider.

  • The quality of the goods (those once supplied by outsiders) may diminish due to scarcer competition.
  • The ability to decrease or increase raw material and component production might be lost as a company may have to sustain a certain production level in pursuit of an economy of scale.
  • It may be hard for a company to sustain its core competencies as it shifts its focus to the integration of its new units.

There are some alternatives to the vertical merger, such as market purchases (like auto parts) and long- or short-term contracts (with service stations and showrooms).

Strategic Examples of Horizontal Acquisitions

Horizontal integration is a firm’s acquisition of a competitive or similar business. It may purchase, merge with, or take over a different company to grow in capacity, grow in size, achieve an economy of scale, to reduce risk and competition, or to get into a new market.  The most prominent examples of horizontal acquisition are the purchase of numerous refineries by Standard Oil, or the purchase of Compaq by Hewlett-Packard.

When Should a Business Consider Horizontal Acquisitions?

A firm may think of a horizontal integration in one of these situations.

  • When an industry is entering a growth phase
  • When its rivals lack a similar level of expertise
  • When an economy of scale is attainable
  • When it can manage the other company’s operations after the merger is complete

Some cubes and one of them is highlightedThe benefits of a horizontal merger are the economy of scale, an increase in differentiation (aspects that help a company stand out from the competition), and the ability to tap into new markets. These benefits are explained here.

  • An economy of scale: The bigger, horizontally-integrated firm can produce more than the merged company at less cost.
  • An increase in differentiation: The firm can offer more features and services to customers.
  • Increased market share: Because of the acquisition, the new firm will become a bigger buyer for its suppliers. It will have a bigger market share and it may have more power over the distribution network.
  • Entering new markets: If a merger is with a foreign company, the new firm will have another ready-made market.

The Disadvantages of Horizontal Mergers

As we briefly mentioned earlier, a company’s managerial staff should be able to handle the larger firm if it is to realize the benefits of the merger. The acquisition’s legal consequences will have to be considered, as most countries have stringent antitrust laws: if the combined entity will force competitors out of business, those laws may be used. Taking Standard Oil as an example, the company was later broken into more than 30 competitors.

As companies grow with horizontal mergers, they may become excessively rigid, and practices may become set in stone. This may prove dangerous to the company’s future. Additionally, predicted synergies may be scarce or even non-existent (for instance, the failed merger of a software and a hardware company in the expectation of compatibility between products). Here is how you avoid common mistakes during the Post Merger Integration Process.

In Closing

The decision to employ horizontal or vertical integration has a long-range effect on a company’s business strategy. Every firm will have to select the most suitable option based on its position in the market and the value it offers to customers. With an in-depth analysis of its resources and strengths, a company can make the appropriate choice.

The Future of Asset Management

Predicting the future of asset management remains a difficult task. However, when combined with a global political environment that remains volatile, the process becomes even more of a challenge. Technology advancements complicate the process as well, and asset managers recognize the only stable thing in their business is change. While this task continues to be difficult, this doesn’t mean it is impossible. What is asset management and what are some trends managers are following to see where this field is headed?

What Is Asset Management?

Who is the right fit for the search fund model?When a client turns over the direction of all or part of his or her investment portfolio to a financial institution or individual, this is referred to as asset management. Investment banks, among others, offer this type of service along with other traditional and alternative products otherwise frequently unavailable to the average person. Asset management functions to mitigate the investor’s risk while increasing the value of his or her portfolio. Investments that may be found in the portfolio include mutual funds, real estate, commodities, and alternative investments among others.

Driving the Industry

Before considering what the future holds, investors need to be aware of the current landscape as well as what is driving the transformations. Stagnancy and narrow profit margins have jolted the industry, leading to a challenging atmosphere for those in the field.

While underlying conditions affect any industry, nowhere it is truer than in asset management. Three core drivers help to explain why this is the case. Asset managers must always operate within a regulatory framework while keeping the preferences of customers in mind. Furthermore, artificial intelligence isn’t the only way in which advancing technology is impacting the industry.

All three factors frequently intertwine and affect each other, which influences future trends. For example, regulatory frameworks must be adjusted as a result of advances in technology and younger investors regard technology differently than those who have been in the game a while. This needs to be taken into consideration by asset managers.

Major Trends to Be Aware Of

What is the current landscape with regard to asset management? Of the three drivers, which are influencing this sector currently? Every investor and asset manager needs to be aware of the big trends that are presently being seen and have been for the past few years.

Low-Cost Investment Funds

The Deloitte 2018 Investment Management Outlook report stated the industry has adjusted to changing investor preferences in recent years. Investors now want passive and low-cost funds while reducing their interest in front-end and back-end load share classes. Exchange-traded funds remain hot today, although the focus has been on everything from smart beta testing to factor investing.

The Reorganization of Companies

interior of an business comapnyThe changing regulatory framework continues to lead asset management providers to boost their organizational agility. Countless companies now choose to break existing tasks into separate components to ensure they are adaptable and flexible, especially with regard to technology. For instance, numerous managers have adopted cloud computing to enhance their agility while relying on virtual data rooms to increase their capabilities.

The European Union and Its Role in Asset Management

Asset management providers need to look globally when it comes to regulatory compliance. The EU opted to introduce the General Data Protection Regulation (GDPR) and asset managers around the world responded. The only exception to this is America. Under President Trump’s leadership, regulations are expected to ease considerably, according to Oliver Wyman.

Looking to the Future

Once an asset manager understands current trends, such as those described above, he or she needs to look to the future. What trends can one expect to see in this sector in the coming years? How will the drivers play a role in this?

Changing Demographics

The world’s population is growing older and the focus of aging individuals will be on increased healthcare and retirement solutions. In contrast, the younger generation is very tech savvy and will want to know more about the investment opportunities available to them.

The PwC Asset Management 2020 report states this move in the investor base will lead to sovereign wealth fund growth. Furthermore, local governments will push for individual retirement plans in response to the aging population.

Data Analysis Will Increase in Importance

Although data analysis has been around for some time now, experts predict it will go beyond different asset options and the study of markets in the future. The KPMG report ‘Investing in the Future” announces successful asset managers will make use of client profiling with the help of technology. The marketing of assets will be streamlined and allow more investors to be reached.

While the current market remains under the control of western consumers, this appears to be changing. As a result, asset managers need to understand a much broader audience. This is due in large part to Asia and Africa and their improving economies.

Sustainable and Social

Asset managers currently recognize the importance of corporate accountability when it comes to social, environmental, and governance issues and feel this trend will increase in the coming years. In fact, Morgan Stanley conducted a survey in 2017 which found that 86 percent of millennials want to learn more about sustainable investing. While companies are aware of this, regulatory and legislative pressure will make this more crucial in the future.

Portfolio Management in the Future

Asset managers need to improve their portfolio management services to react quickly to specific developments while taking the big picture into consideration. With the help of a virtual data room, managers find they are able to benefit from the latest technologies while harnessing them to better manage assets. Furthermore, responding to regulatory pressure becomes easier and customers benefit as they are offered a quality portfolio.

Virtual data rooms provide real-time analysis of data coming in and enhance access to this data. Furthermore, they improve the relationship between the client and his or her asset manager while responding to the informed client. Research conducted by Greenwich Associates found that this relationship is of great importance and asset managers must possess outstanding presentation and persuasion skills to succeed. Furthermore, transparency and openness need to be present in the partnership. Fortunately, the regulatory pressure being placed on the managers makes the entire industry more transparent.

Asset managers can no longer focus on their home country. In the future, the industry will go international and make the management of portfolios more challenging. Fortunately, with the right tools, complexities become easier to navigate and staying ahead of trends remains a possibility.

Looking Out for Deal Breakers During Mergers and Acquisitions

While both sides of a merger or acquisition hope the deal will go through without any issues, that’s not likely to happen. Issues are expected during this process, but they shouldn’t be enough to cancel the deal. Buyers, however, will want to make sure they understand what could be a deal breaker and what they should watch out for during the entire process so they know if they need to walk away.

What is a Deal Breaker?

A deal breaker can be just about anything that causes the buyer or seller to cancel the merger or acquisition. Buyers are going to want to make sure the merger or acquisition is going to go as smoothly as possible and that it will be a success in the end. To try to reach this goal, they’ll want to look for anything that could be a large problem. These large problems are the deal breakers that could mean a merger or acquisition is just not a good idea any longer.

Knowing When to Walk Away

When a lot of time has been spent working on a merger or acquisition, it can be easy to think that large problems will be solved eventually. The issue is, it may cost a lot more in the long run to solve the issue or it might be impossible to actually solve. Deal breakers should be carefully considered to make sure the deal could be successful and that the merger or acquisition is not going to be the end for either of the businesses. Buyers and sellers will want to make sure they know when to walk away from any deal that could be potentially a poor decision.

Miscalculations or Higher Than Expected Costs

When price starts to be discussed, there’s a lot to go into it. Buyers can be shocked when the seller prices the business more than they expected. Sellers might be surprised when buyers value the business much higher or lower than they expected. The value often goes hand in hand with forecasting the potential financial future of the business, which can be difficult to do.

Miscalculations can come when there are inflated numbers for the business or the financial history doesn’t equal the financial past of the business. It’s better to be conservative with the calculations for the future of the business to get a more accurate idea of the current and future value of the business. Since mergers and acquisitions can take time to complete, miscalculations can become apparent during the deal. If this happens, careful consideration of what was miscalculated and the impact it has will need to be done to ensure the deal is still a good deal.

Unclear Terms for the Merger or Acquisition

The Letter of Intent (LOI) is basically what the final deal will include. This should include more than the price. It should include all of the terms of the deal, the closing date, any protection if the deal falls through, and more. This is often more important than the price because the terms are what both sides will need to agree to. With the LOI, make sure all terms are as clear as possible. Unclear terms could lead to issues down the road where one side believes something is happening and the other side believes it should be handled differently according to the terms. Unclear terms in an LOI should be rewritten before it’s accepted or the deal may not be able to go through.

Business Erosion During the Process

Mergers and Acquisitions can take up to a year to complete, which can lead to huge changes for the business being sold. Employees, clients, and vendors may be uncertain of the business’s future, so there may be changes with them during the deal. Advisors should be able to handle this during the negotiations, but it’s possible the business changes to the point it’s no longer a good deal. If this happens, it’s best to walk away.

Irreconcilable Differences Between Businesses

For mergers and acquisitions to be possible, the businesses need to be able to blend together. Looking into the cultures of both businesses is crucial as this enables buyers and sellers to ensure the deal is going to be one that is beneficial for most businesses. It’s important to find this out as early as possible, before the negotiations get too far. If the businesses have mismatched strategies, the systems applications cannot be combined, or if there will be any other major issues between the two businesses, it may not be a good deal for the buyer.

Insufficient Planning Before Merger or Acquisition

The planning that goes into a merger or acquisition is crucial. Proper planning makes the entire process possible and can help attract more buyers or help the deal go smoother. Sellers will want to watch out for deals where the buyer is not prepared for the merger or acquisition and doesn’t know what the business is worth, the true value of everything the business has, or what needs to be done to complete the merger or acquisition.

Inflexibility of Seller or Buyer

Mergers and acquisitions involve a ton of negotiations. There are points that the buyers and sellers will need to discuss before they can find a common ground to agree on. If the buyer or seller is not willing to negotiate, it could be a sign that there is a lack of seriousness in the deal. Buyers who are not willing to negotiate might mean they aren’t really interested in buying the business and sellers who won’t negotiate might not be ready to commit to the sale yet. Inflexibility on either side can mean the end of the deal.

Buyer Financing Issues

Buyers need to be able to purchase the business. Many times, they need to be able to get a loan to cover the cost of the business. However, it’s possible the buyer will have trouble getting funding to purchase the business. When this happens, it may end up being a deal breaker if the funding is not eventually obtained. Sellers will not want to delay the sale indefinitely while they wait for funding to be arranged.

Data Privacy Issues

Data privacy will be crucial for both businesses. Before the merger and acquisition can be completed, this needs to be discussed between both sides. There should be a discussion over how information is collected during the merger and acquisition process, what happens to the data after the deal is complete, and how the data will be kept secure during and after the process. If the information that needs to be kept private cannot be secured and kept private, the deal may not be viable.

Issues Meeting Regulations

Some businesses will need to meet laws and regulations. This is common in highly regulated businesses like those in healthcare, finances, or businesses that deal with children as consumers. The business should already meet all regulations, domestic and international, and should provide disclosures about the regulations for the buyer. If regulations are not already met, it could mean the business is going to have issues in the future that the buyer will need to deal with. This could mean the deal is not a good deal for the buyer and it may be better to walk away.

Extended Delays Throughout the Process

Wann Firma verkaufenThe entire process can take up to a year or longer. When the seller isn’t prepared, the buyer cannot obtain financing, or there are other issues that delay the process, the deal may not be able to be completed. Some delays are expected through the process and should be handled as they occur. However, if there are too many delays because of one side, if the delays go on for too long, or there just isn’t progress being made in the deal, there is more time for potential issues to occur. Delays can be a sign that the deal should not go through or that one side is not really ready for the sale. Extended or numerous delays can definitely be a deal breaker.

Due Diligence to Find Deal Breakers

There is a lot that goes into the sale of a business. Buyers and sellers should be aware of potential deal breakers and which ones they can impact to make it less likely the deal will fall through. During the merger and acquisitions process, the buyer needs to ensure they do their due diligence. This enables them to find deal breakers like incompatibility that simply cannot be fixed to allow the deal to go through. Doing this enables them to make sure they can find these issues before it’s the final hours of the deal to minimize the time and money spent on a deal that simply won’t work.

If you’re planning on going through the mergers and acquisitions process, understanding potential deal breakers will allow you to see when you should negotiate further or when you should walk away from the deal. Pay attention to the potential deal breakers here and do due diligence to ensure you know how to handle the process and what could happen during the merger and acquisition.

Non-Disclosure Agreements: Important Facts Every Seller Should Know

Non-Disclosure Agreements (NDAs), sometimes referred to as Confidentiality Agreements, are universally binding contracts intended to ensure the confidentiality of shared information. They are frequently used in a wide variety of business transactions, including Mergers and Acquisitions (M&As).

It can be difficult for those who don’t have dedicated legal experience to understand exactly what information needs to be included in a Confidentiality Agreement. Given that these forms are considered to be binding contracts, it’s important for buyers and sellers to know what they’re agreeing to when they sign on the dotted line, though. This article will introduce the key terms of NDAs, including the most striking differences between standard form NDAs and M&A MDAs.

The Basics

As stated above, NDAs are designed to ensure the confidentiality of information being passed from one party to another. There are two basic formats for NDAs: mutual and non-mutual agreements. The former is typically used in business transactions where both parties will likely be sharing confidential information, while the latter is often more appropriate for M&As, in particular.

Since sellers are the ones who typically release confidential information during the M&A process, NDAs are designed primarily to protect their interests. Often, though, the terms of NDAs are negotiated prior to the sale. Thankfully, sellers do typically have substantial leverage when it comes to negotiations and sending out form NDAs is an accepted part of the sale process.

Why Go Non-Mutual?

The majority of M&A sellers prefer non-mutual NDAs, especially if they do not anticipate receiving confidential information from their buyers. The use of a non-mutual NDA offers prospective buyers the assurance that the seller will not be requesting access to restricted information, as well. The majority of serious, cash buyers don’t intend on sharing confidential information, to begin with, so although the use of a non-mutual NDA is of primary benefit to the seller its use generally goes unquestioned by buyers, as well.

Essential Elements

NDAs don’t have to be absurdly lengthy and complex documents. In fact, well-structured NDAs are typically only a few pages long. There are a few essential elements that should be included in every NDA, especially those issued in the process of M&As.

Every NDA should begin by identifying the seller and the buyer. It should also offer a precise definition of what is considered confidential information in the context of the M&A and what the scope of the confidentiality agreement will be for the recipient. Often NDAs include terms obliging the buyer to either return or destroy certain information that has been deemed confidential when it is requested by the seller.

The NDAs used in M&As typically contain a set term, as well. When that term expires, the agreement will be voided. If there are any exclusions from confidential treatment that will be in place throughout Defining Confidentiality.

Woman making a phone call and smilingSellers should make a point of carefully defining what information is considered confidential, as disreputable buyers may intentionally seek out loopholes that allow them to start using the company’s valuable secrets before the term of the NDA has expired. Decide in advance whether oral information can be deemed confidential or if, by definition, confidential information must be actively defined as such in writing. Since orally conveyed information can be a tricky subject, many M&A NDAs contain stipulations that the confidentiality of any information conveyed orally to the buyer must be confirmed in writing within a certain period of time.

Non-Use Agreements

The purpose of sharing confidential information with potential buyers prior to executing an M&A is to facilitate negotiations. Most NDAs go one step further than just requiring recipients to keep confidential information to themselves, though. They also contain clauses specifying the intended use of confidential information, which is exclusively to be used for evaluating and negotiating the specific M&A transaction in question.

Explicit Exclusions

Sellers may not be happy about it, but the fact is that almost every NDA, no matter how beneficial to the seller, contains at least a few exclusions. These are intended to release the recipient from the terms of confidentiality and non-use in certain circumstances that may place an unreasonable burden on the buyer.

Letter Of IntentExclusion clauses typically cover, at a minimum, information that was already available to the recipient prior to signing the NDA and not explicitly subject to the obligation, information that was publicly available prior to signing, and information disclosed to the buyer by a third party with no obligation of confidentiality.  Some NDAs also allow for the use or disclosure of information that has been independently obtained by the buyer without the use of any information covered by the NDA.

Sellers should also bear in mind that there may be circumstances under which buyers will be forced by court orders to disclose confidential information. Even an NDA offering the maximum possible amount of seller protection cannot require buyers to break the law by withholding information. However, it can require the recipient to offer adequate advance warning prior to releasing information under a court order.

Return or Destroy Provisions

Every NDA, whether drafted in the context of an M&A or used for other business transactions, will include a provision that requires confidential information to be either returned or destroyed upon request. In the context of M&As, this provision is designed to protect sellers in the event that the acquisition does not move forward.

Sellers should word their return or destroy provisions carefully. They should ensure that the NDAs recipient is required to delete electronic files in addition to paper copies and to turn over any analyses that have been performed in-house using confidential documents.

Additional Provisions

The NDAs used for M&As may also include a number of additional provisions, although they are not required. It is not uncommon for sellers to include injunction clauses governing how breaches of the NDA will be handled, for example. Many sellers also require provisions that explicitly remove the contractual obligation to go through with the M&A except as provided in any future agreement and just about all of them include disclaimers regarding the accuracy and completeness of the information being provided, as well.

Find the Best Business Broker to Sell Your Company

It’s time to sell your business. You may be looking to retire, ready to launch a new business, or ready to move to an exciting new city and see what’s waiting for you. No matter why you’re ready to sell, the top thing on your mind is likely getting the best price for your business. You’ll want to have enough money to make that next move. As you get ready to sell your business, consider hiring a business broker to sell your company. While you will need to spend some money to pay the business broker for their services, this can help you get a lot more for your business in the long run.

If you’re planning on selling your business soon, start today to find the right business broker. You don’t want to end up working with one who can’t get you the money you need for the company or that takes forever to find an interested buyer. You don’t want to wait years for the business to sell. Finding the right business broker means you’ll have help fast, you’ll get personalized assistance to sell your business, and you’ll be able to find the right buyer as quickly as possible. It may also mean you’ll get more from the sale of your company.

Benefits of Working with a Business Broker

The main downside to selling a business on your own is that you don’t have experience. You may have an idea of the type of buyer you want to sell your company to, but you won’t know how to find the right buyer, how to make sure the sale is successful, or how to get as much as possible for the company. This is where a business broker comes in. They offer a ton of benefits that can help you get more when you sell your company. Some of the benefits include the following.

  • ClockFree Up Your Time – Selling a company on your own requires you to spend countless hours marketing your business, looking into potential buyers, and dealing with the actual sale once you find the right buyer. A business broker handles all of this for you. This gives you more time to maintain your business and continue doing everything you’ve been doing up to the decision to sell.
  • Determine the Sale Price – How much is your business really worth? It can be incredibly difficult to determine the true value of your company and figure out how much you should get from selling it. Business brokers have experience and access to information that helps them determine the value of your business. They’ll make sure they can get as much money as possible with the sale.
  • Provide Marketing for the Sale – Marketing the company is a crucial step to help bring in many potential buyers. A business broker knows how to make the company look good to potential buyers to sell the company fast and get more money for it.
  • Make Sure the Company Sells – Once a buyer is found, there is still a lot to do to make sure the sale goes through. The business broker works on making sure the company is sold as fast as possible to minimize potential issues. They’ll work with you to create a deal with the buyer then finalize the sale of your company.

How to Find the Best Business Broker

Like any industry, some business brokers are far better than others at what they do. Some have more experience overall or more experience in your industry and some are going to work hard for you while some may just try to sell the business fast, without much concern over getting you the best price. When you’re looking for a business broker to sell your company, there are a few things you’ll want to look out for. Keep an eye out for a broker who has the following before you decide to hire anyone.

  • Experience Selling Businesses – Check the experience a potential business broker has. Business brokers should be able to provide you with a list of previous clients as well as examples of the work they’ve done in the past. Look into the references they provide to see what kind of work they’ve done previously. This gives you a good idea of what to expect them to do for you.
  • thumbs upGood Reputation – Reviews are available for everything, even business brokers. Look online to see if there are any reviews for the business broker you’re considering and read through them carefully. A business broker who has a good reputation is likely going to be a better option as you can trust they’ll work hard to sell your business.
  • Specialization in Your Industry – General business brokers are available, but they might not know about certain details in your industry that can impact your sale. Look for a broker who has experience selling businesses in your industry as well as in your area. This can help you get more when you sell your business because they already know how to sell a company like yours.
  • Uses a High-Quality Marketing Plan – How they market your business makes a big difference in the potential buyers they’ll find. Learn more about how they plan to market your business and ensure they’re going to create a high-quality marketing plan specifically for your business to attract the right buyers.
  • Ready to Tell the Truth – Make sure the broker you choose is going to tell you the truth, not what you want to hear. It may be hard to hear that you won’t get as much money as you want for the company, but you need to be able to trust that your broker is being honest about the value of your company and issues you might face during the sale.

Red Flags to Watch Out for When Choosing a Business Broker

It’s just as important to know the red flags to watch out for as it is to know what to look for in a business broker. If you see any red flags when you’re meeting with the broker for the first time, skip that broker and work on finding a much better one to help you.

If the business broker requires the majority of their fee or all of it upfront, go ahead and walk away. While you may have to pay some of their fee at the beginning, you should never pay the full price until your company is sold. This is a major red flag that the business broker is not going to actually help you sell the business but, instead, is going to take your money and disappear.

Brokers need to take advantage of many different marketing techniques to reach out to buyers for you. If they don’t have a website, it’s a sign they might not be up to date and may not be able to reach out to nearly as many buyers. This could lead to a much lower sale price for your company if they’re able to sell it.

Hand shakeTalk to the business broker about the price for your company. If they seem overly confident, they might be trying to get too high of a price for the company and may have trouble actually finding potential buyers. Also, ask about how they are going to do the valuation for your business and what it includes. You want them to be able to explain to you and to potential buyers why your business is worth as much as they think it’s worth. If they can’t explain how they came up with the number, it’s possible they’re trying to reach for too high of a selling price.

What to Expect After You Hire a Business Broker

After you’ve found a business broker you want to work with, expect them to get started working on trying to sell your business right away. They’ll need to determine the market value for your company so they know how much it should sell for. Then, they should start working on finding the right buyer. They’ll need to use a high-quality marketing plan to let potential buyers know about your company and to get them interested in buying your company. They should be able to find a buyer fast, though the amount of time this takes does vary. Once a buyer is found, the business broker should work closely with you and other professionals to facilitate the sale and have everything finalized as fast as possible.

The decision to sell your company is a huge one. You want to get as much as possible from your company so you can move forward with your retirement, starting a new business, or anything else you want to do in the future. Use the tips here to make sure you’re working with the right broker. The right business broker is going to work hard for you and strive to make sure your company sells quickly. They’re going to make sure your company sells for as much money as possible so you’re happy with the outcome of the sale.

methods of company valuation

Methods of company valuation

Business valuation allows you to establish what your venture is worth. The process involves a number of key steps aimed at reaching an accurate valuation. Some of the key steps, which can be supported by an adequate dataroom solution, include adjusting financial statements, selecting appropriate methods of company valuation and applying the chosen techniques. Before gathering the relevant information, you need to determine reasons for the valuation.

Methods of company valuation

1. Asset Valuation

This method entails the valuation of your firm’s tangible and intangible assets. It places emphasis on property that produces cash flow. The value of the assets is determined by the market or book value minus the company’s total liabilities.

Some of the items considered in the valuation include real estate, equipment, patents, inventory, trademarks and more. The approach offers some degree of flexibility when it comes to the inclusion of assets and the determination of their value.

Asset valuation is usually conducted before selling or purchasing an asset. You can also perform the valuation prior to taking out insurance for an asset. The approach can be based on various factors, including transaction value, cash flow or comparable valuation metrics.

The value of your company may be greater than the value of recorded assets. Records may not incorporate proprietary solutions and internally developed products. Intangible assets can be difficult to valuate and they may come in the form of special services and products that help the firm to stand out.

2. Historical Earnings Valuation

The current value of your business is determined by its ability to capitalize earnings or cash flow and liquidate debts. The value of the business takes a knock when revenue is low. These factors can be used to determine the firm’s historical earnings valuation. In addition the entire valuation process can be regarded as an economic analysis exercise. The key inputs for the exercise come from your firm’s financial information.

To valuate historical earnings, you need the balance sheet and income statement. Incorporating business information covering between three and five years provides a practical way to create a more comprehensive view. However, you have to recast or adjust historical financial statements. This is aimed at establishing a link between income, operating expenses and the required business assets.

3. Discount Cash Flow Valuation

This valuation method provides an accurate assessment of your business’ potential future earnings. You use it to determine the venture’s attractiveness as an investment opportunity. The approach achieves the objective by discounting future net cash flow into present value estimates. Investors will find the opportunity attractive when the value of discount cash flow valuation is greater than the cost of the investment.

Several variations are applicable when assigning values to the discount rate and cash flows. The process involves performing complex calculations with the aim to establish the returns an investor would gain. You adjust the returns for the time value of funds, which guides by the assumption that money is worth more today than tomorrow. On the other hand, you assess the future value of investments using WACC as the discount rate.

4. Future Maintainable Earnings Valuation

The Future Maintainable Earnings (FME) methodology is a simplified version of the discounted cash flow. You can employ the FME when expecting the profits to remain stable for the foreseeable future. The method involves the evaluation of expenses, profits and sales covering at least the past three years. The result enables you to perform accurate forecasts and determine the value of your business today.

Earnings-based valuations require careful considerations of various key factors. These include the separation of assessments involving surplus or unrelated liabilities and assets. You should determine the capitalization rate, which matches an investor’s preferred rate of return. In addition, it should reflect future growth possibilities. The earnings estimates should cover historical and forecast operating results.

5. Relative Valuation

A relative valuation model provides a practical way to compare your company’s financial value against similar businesses. When you make comparisons based on business assets, the method helps you determine a reasonable asking price. The approach is an alternative to the absolute model, which establishes intrinsic value based future cash flow projections discounted to their present value.

Relative valuation achieves the objective using benchmarks and multiples. Identifying an average makes it easier to choose a benchmark. The average also enables you to confirm relative value.

Some of the relative valuation ratios used in the process include enterprise value, price to free cash flow, price-to-sales for retail, operating margin and price to cash flow for real estate. When it comes to methods of company valuation, the price-to-earnings (P/E) ratio is one of the most popular multiples. It entails a simple calculation. You simply divide the stock price by earnings per share.

When your firm has high price-to-earnings (P/E) ratio, this means it is trading more profitably than other companies in its sector. In contrast, people regard a firm with a low P/E as undervalued. You can implement this approach on any multiples with the aim to determine an entity’s relative market value.

Venture Capital Gesellschaften: Meistens mehr als nur Geldgeber

What is Venture Capital and How Does it Work?

Entrepreneurs have a variety of different ways to get money for their startup or small business, but they’re not always a viable option. Instead of applying for loans and potentially being denied, entrepreneurs might want to look into venture capital for the startup or growth money they need. This can be an excellent option that gives them the chance to get all of the money they need quickly, even if other ways to raise funding have not been successful. Before getting started trying to obtain funds through venture capital, it’s important to learn more about exactly how it works.

What is Venture Capital?

Venture capital is a way of raising funds to start a business by getting money from investors, investment banks, and other types of financial institutions. Venture capital is typically monetary but can also include managerial expertise to help the business get started. Providing funding for a startup can be risky for investors, but they can receive a huge payoff if the business is successful. For the entrepreneur, this is an excellent way to raise funds as it’s available even if they cannot receive funds through a loan or other standard options. Whether or not they’ll receive funding is based on their business and the chances it has of being successful.

Potential Risks with Venture Capital Deals

Potential small business owners may have trouble getting the funding they need through traditional options, which is why venture capital is an excellent option for them. However, this doesn’t mean it’s without risks. The main downside for venture capital deals is that the investors typically get equity in the startup. This means they may get a say in company decisions. While this can be beneficial because of their previous experience, it isn’t always beneficial for the business owner as they’ll have to work with their investor on the business.

For the investor, the potential risk is in the business failing or not being as successful as they might have hoped for. Depending on the way the deal is set up, this could mean the investor pulls out and stops providing funding for the business. If this happens, the business owner will then need to find an alternative way to fund the growth of their business.

How Does Venture Capital Work?

secure your investor realtionsVenture capital works because investors are willing to provide money to help small business owners get started. The investors are typically high net worth individuals, also known as angel investors. They are often former entrepreneurs themselves or have successfully created business empires in the past and are now looking for a way to invest their money in the future. Venture capital deals can also come from investment firms or from individual investors who have decided to work together.

Though there are risks for these investors, their goal is to increase their wealth through their investments. They often look for businesses they believe have a large chance of being successful so they can make the biggest profits possible. They tend to look for well-managed companies and companies that have a fully-developed business plan. They also often look for businesses that are in a field they’ve previously worked with as they may have some experience they can offer the entrepreneur they’re investing in. They will often provide their expertise along with the funds to help ensure the business venture is as successful as possible and increase their chances of higher profits from their investment into the startup.

Step-By-Step for Venture Capital Deals

Entrepreneurs who want to take advantage of venture capital should start by submitting their business plan to a venture capital company or investor. The business plan should be detailed and should show potential. Investors want to know exactly what they’re investing in and what the plan is to make the business a successful one.

The potential investor will then perform their due diligence to determine if they want to invest in the business. This includes a thorough investigation of the business model, management, operating history, products, and more. They’ll look through everything to ensure they’re investing their money wisely.

After the investor has thoroughly checked out the business they’re considering, the next step is for the investor to pledge funds in exchange for equity in the business. They may offer the funds all at once or in pieces as some milestones are reached. In these cases, the investor will take an active role in the business and monitor the business’s progress before deciding to provide more of the funds.

How to Get an Investor for Your Business

Start by working on your business plan. Whether you’ve been in business for a couple of years or you’re just getting started, a business plan is invaluable for you as well as for a potential investor to see how you’re going to continue to grow your business. Your business plan should be as detailed as possible to ensure the investors can see they’re making the right decision by investing in your business.

Once your business plan is ready, make sure you find the right investor. There are investment firms, investor groups, as well as individual investors to consider. You’ll provide them with your business plan and wait to see if they’re interested in investing in your business. Many times, the investors want to stick with a field they’re familiar with. For the best chance of finding an investor, try ones who have previously worked in the same field as the business you own.

Finding funding for a business can take on many forms, with venture capital being just one of the common techniques used today. If you need money for your startup, consider working with an angel investor or venture capital firm to get the money you need without worrying about taking out a loan for your business. This could be an excellent opportunity for you to gain the funds you need and to get other benefits as well, such as the experience and assistance of your investor.

What is a Non-Disclosure Agreement and Why Do You Need It?

A non-Disclosure Agreement (NDA) is an agreement between two different parties about how to handle sensitive information. Typically, an NDA is signed before releasing confidential information to another party to ensure the other party will not disclose that information to someone else. In some cases, the NDA is for businesses working together and covers sensitive information given out about either party. There are many different instances where an NDA can be useful and crafting the NDA carefully can make a big difference in how enforceable it will be.

Why is an NDA Important?

An NDA is crucial where a business wants to keep employees, businesses they’re working with, and others from sharing confidential information. This information could include trade secrets, client information, strategies, product information, or any other proprietary information they might have. It is basically designed to keep secret information secret so no one can make a profit from it. They may also be used to show that the company owns anything developed on behalf of the company during a staff member’s employment or to keep employees from starting a competing business by using trade secrets or taking the company’s current clients.

When an NDA is created and signed by both parties, it becomes a legal agreement. It is not an oral or implied agreement and holds more weight if there is a breach of the non-disclosure agreement. If there is a breach, the person who breached the agreement can be sued. They may have to pay to cover lost profits. In addition, since the NDA is a legal agreement, someone who breaches it may be found in contempt of court and face criminal charges along with a civil suit to cover any damages from the breach.

Basically, a non-disclosure agreement enables employers to use the court system to recover damages if trade secrets or other proprietary information is revealed by someone who has signed the agreement. They have proof that the person was aware they could not reveal the information they knew about but went ahead and shared the information with someone else.

Why Should You Have an NDA?

Businesses often have many different reasons to create and use a non-disclosure agreement. If they want to protect trade secrets or client information that employees may be able to access, they can have the employees sign an NDA. If the business owner wants to sell the business, they might have an NDA for potential buyers to sign before discussing how the business works or the details for the products they sell. Businesses that hire freelancers or independent contractors may also want to create an NDA as this can help protect the business in the event a freelancer or independent contractor decides to share confidential information.

What Should an NDA Include?

Man in a suit, standing next to stairsAny non-disclosure agreement a business creates should be designed with their specific needs in mind. Business owners may want to hire a lawyer to create the NDA to ensure it will hold up in court in case a breach does occur. There are a few important pieces every NDA should have, however, to ensure it is as complete as possible before both parties sign the agreement.

  • Who is Involved – Every NDA should include who is signing the agreement. This may be more than just the name of both parties and should include which party is sharing the confidential information and which party is receiving the information.
  • What the Confidential Information Includes – Every NDA must include a description of the confidential information. It should note exactly what is confidential as well as what is not confidential and can be shared with others. The agreement should be as specific as possible so it’s clear what it covers and what it does not cover.
  • Expiration Date – If the NDA covers information that is not always going to be confidential, there should be an expiration date included in the NDA. For instance, if the information is about a new product that will be released in 6 months, the expiration date for the NDA might be the same as the release date for the new product. Some non-disclosure agreements will not include an expiration date as the confidential information can never be released.
  • What Signing the NDA Means – It’s usually a good idea to include information on what happens if there’s a breach of the agreement. This could include legal information about going to court to seek damages for the release of the information.
  • Potential Immunity – There may be times when the information needs to be released to another party, such as when it’s ordered through the courts. There should be a section in the NDA that covers what happens if the information must be released and when it can be released if required.
  • Other Information – The agreement might also include how disputes are resolved, where disputes are resolved, who pays the legal fees if there is a dispute, and more. Any information that might be needed by one party or the other for consideration before signing the NDA should be included in the agreement so they have all the information before signing it.

Store Sensitive Documents in a Data Room

Writing a business emailAn NDA can discourage people from sharing the information and provide remedies if the information is shared but does not actually stop someone from sharing the information. Along with creating an NDA, it may be a good idea to look into how documents that may need to be shared are handled. Data rooms are designed to protect sensitive documents so only those who have permission are able to view them. While this may not be able to completely stop someone from sharing the information, it does add another level of protection.

If you have trade secrets, important client information, or other information that should be kept confidential, having a non-disclosure agreement that must be signed before the information is shared can help you keep protect it. After creating the NDA, consider keeping your sensitive documents safe in a data room. Between the data room and the non-disclosure agreement, you can keep your sensitive information much safer.