Due diligence – getting your “data ducks” in a row

Business owners contemplating an exit, either now or in the future, will want to secure the best possible value for their business.  To do this, their business will need to go through a due diligence process.

Due diligence can either be commissioned by a buyer or a vendor.  Either way, the due diligence process will involve a detailed review of the mechanics of the business, and challenging the key metrics that will support the value of your business.

Due diligence teams look for evidence to support their findings and this requires data. Getting your “data ducks” in a row is therefore an important part of the due diligence process even before it begins.  Here are some key tips:

• Management accounts: Have a consistent set of detailed monthly management accounts covering at least the past three years. This should include detailed profit and loss account and balance sheet information together with supporting analysis.
• Key Performance Indicators (KPIs): monthly management accounts tell the basic financial story, but it will be the KPIs that articulate how this performance has been achieved. Consider what the best metrics are to do this and ensure that the data underpinning each KPI is available and agrees back to your management accounts.
• Revenue and margin analysis: buyers will want to understand monthly trends in revenue and gross margin by product, service and, potentially, by customer. Use the underlying data in the business to support the story of the business and explain any fluctuations in the monthly trading profile.  Advanced data analytic techniques are a great tool when dealing with large data sets here.
• EBITDA: buyers will typically value a business based on a multiple of its EBITDA.  Identify any non-recurring items or other adjustments that do not reflect the underlying performance of the business and compile the evidence to support any adjustments identified.
• Balance sheet: to inform their view on net cash/debt and net working capital, buyers will want to understand in detail the composition of your balance sheet.  Have detailed schedules available that agree to the management accounts for the latest balance sheet and the previous three financial year ends.
• Annual accounts: buyers will not rely on a set of annual/audited accounts, but they will want to see how your management accounts reconcile to the statutory accounts. Be prepared to explain the nature of larger variances and their impact on the management accounts.

Most importantly, prepare thoroughly for the due diligence process.  Consider what the most important factors are that have driven the financial position and performance of your business.  Are there any inconsistencies that need explaining?  Make the story as easy for a buyer to understand and this will help prevent value leakage.

So, if you are looking to sell your business, contact Andrew Nelson, Partner at Cowgills Transaction Services on andrew.nelson@cowgills.co.uk to arrange a discussion on how we can help you prepare for a transaction. To find out more about Cowgills, just click here.