Posts Tagged ‘assessments’

Financial Due Diligence – Beyond the Dream to Reality

Saturday, June 12th, 2010

 By Mary Whetstine

In our previous financial analysis article, Due Diligence/The Tool for Transparency, we discussed the necessity for due diligence for an investment or acquisition.  We are now going to examine the critical part of the process:

 

Financial Due Diligence

You now have made the decision to move forward with the strategic acquisition or selling of the company, the patent, the license, or the design that will take your current company to the next level.  This is where you go beyond the dream and the great idea. This is where we detach from the emotion and the energy and we ask” is there enough substance to last?”  Be prepared to do your research and know your company’s past, present and future,  because if you are to be successful with your capital requests, your private, closely held group will be turned inside out and inspected.

Financing needs and terms—why is the capital needed?  Will it be used for products or personnel?  A timeline needs to be established.  How does the funding need to flow, exactly how and when it will be consumed?  Is the company public or private?

Business Model and budgets—this may seem really basic, but know your cash flows.  What are your expenses and revenues and how they are affected by the capital? Prepare a balance sheet and detail liabilities.   Do you plan to hire people or buy equipment?  What is the burn rate?  Have your goals and objectives mapped out, short and long term?  How will the capital be used upon receipt and what is a one year milestone?  What will the company look like a year from now?  Prepare projections detailing scenarios for best, worst and most likely, include the dates and when you estimate you will break even.  Finally, what are your future funding needs and who do you see as a possible source for that capital?  What are the milestones that will have been achieved that will enhance your receiving that next round of funding?  Do not fall into the trap that by acquiring the funding you have just hit the lottery.  Demonstrate that the money will be used for solid enhancement of the business and not perks.

            Compensation—if stock options are used, know the vesting schedule as to how the plan dilutes stock.  If there are restricted shares, what are the details of the restrictions?  Determine how the founders, board and key employees are compensated and if there is a vesting schedule.

Without being able to answers these questions, there is no going forward because you don’t even know what you have, nor a justifiable value of what you are seeking to acquire or sell.  Without that full understanding of value, it will likely be a futile attempt to convince an investor that your company, the patent, the license, the design is a great investment.

Dear Reader: Can you share a financial due diligence experience that had either positive or negative results in the acquisition or selling of a company or intellectual property?

 

Next time we’ll finish financial due diligence by exploring some of the legal elements to review.  Then move on to the competition and marketing components.

DUE DILIGENCE/THE TOOL FOR TRANSPARENCY

Monday, May 10th, 2010

By Mary Whetstine 

Do you know what you don’t know when investing in or purchasing a business or Intellectual Property (IP)?  Few of us have walked the path of life when we have not made some type of investment or purchase in which we “assumed” we knew what we were getting, only to be sorely disappointed? Perhaps assuming because the higher price of the product or entity we were getting exceptional quality, or of the evil assumption twin, of “getting a deal” because we were paying “below market value”? John Ruskin, the 19th century English poet and social thinker was attributed to saying: 

There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man’s lawful prey.” 

The research needing to be done is the due diligence.  When we are making significant investments (in these times what investments are not significant?), the dire need of examining the multiple layers of the deal or the IP product is critical. There are pitfalls of Due Diligence that can become a door or a window.  Does it impede or facilitate the outcome? You and your team need to know what you intend to purchase and why.  The real question becomes, ‘Is what you see, what you get?’   And how about what you don’t see on the surface?  What are the gems and landmines that need to be uncovered?   Is the value and the cost for the venture merited? 

That is the essence of due diligence.  Value and risk, the balance determines if and how much to invest.  Whether an individual, venture capitalist or investment banker, the questions need to be answered before capital is invested. 

Make the ‘No’ or ‘Go’ decision before too much time or money is spent.  Most deals do not make it beyond this exploratory stage. 

To the reader:  Can you share an experience where solid, Due Diligence has guided you and your team to a great decision, that might otherwise been catastrophic? 

 Over the next few weeks, we will be discussing the components of the audit process.

The next article in this series will be: — Financial Due Diligence 

 By Mary Whetstine, Financial Analyst

Alternative Dispute Resolution (ADR): Positional Bargaining Negotiation

Tuesday, February 23rd, 2010

In a previous article we discussed the concept of negotiation and defined it as a process in which the parties involved communicate with one another through a facilitator to resolve a dispute, consummate a transaction, or simply to reach agreement in order to create balance or clarity.  There are two primary styles that we are going to address, Positional Bargaining Negotiation and Interest Based Negotiation.   Today we will discuss Positional Bargaining Negotiation.

Positional Bargaining

To illustrate positional bargaining, consider an actual situation in which a partnership was ending.  In 1996 two young, bright and close friends Jason and Matt founded a software internet based company.  However, within months of the launch, it became apparent that their business and people skills, as well as their business philosophies were in most ways on opposite ends of the spectrum.  The business took off extremely well and they put their put their differences aside and took positions of simply accepting these differences.  Soon the business flourished and they enjoyed making the type of money that neither had ever even dreamt of.  Going into their fourth year, the day-to-day operations of the business became highly stressful for both Jason and Matt.  It was now reaching a point where it was having an effect on their personal production.  With professional guidance, both became cognizant of the dysfunctional nature of their partnership and how it was manifesting itself not only in their business, but also in their personal lives; it was at that point both agreed that it was time to end their partnership. Jason asked to be bought out so that he could start another technology company and Matt was in agreement.

Fortunately, aside from being savvy technology entrepreneurs, they also were also forward thinking when they started their partnership.  They had created a partnership agreement with their attorney, an agreement with an exit strategy.  As with many such agreements there was a buy-sell provision that arranges a buy-out; if one partner leaves the business, the other partner must buy him out.  This provision included a buy-out based upon a prenegotiated percentage of the business value.

The Bargaining

This was a 3 step negotiation.  First, was agreeing on a mutually acceptable non-compete agreement. Second, was agreeing on what firm would perform the objective Third Party Valuation.  The standard process for the valuation is for a qualified industry valuation expert to analyze the financials, market trends, industry trends and comparables of similar businesses in their segment of the technology industry.  A key component of the process was an IP assessment of their IT intellectual property for licensing, trademarks, copyright and a pending patent. The due diligence process was a main ingredient to forming a positive closure of Jason’s and Matt’s business relationship; a third party performed an objective valuation on their IP, which otherwise might have been an emotionally volatile situation. The final business valuation provided a specific range of value on what their business could likely be sold for in the current market place.   

In the first 2 steps, there were basic pragmatic decisions that were easily agreed upon.  The third step was the primary focus of this mediation.  In this type of negotiation, parties will often examine their strengths and weaknesses to establish maximum and minimum figures before going into negotiation.  During the course of the negotiation, both Jason and Matt went strategically back and forth on price, based upon their perceived value.  With outside, objective professional guidance, they both moved incrementally towards each other’s negotiated numbers to arrive at a mutually accepted figure. 

With the monies from the buyout, Jason was able to jumpstart his new endeavor and it has taken off nicely. One of the lessons that he learned from his business experience with Matt was the importance of creating a clear, consistent vision of who his company is and where he wants it to be.  With such awareness he was able to become a more effective and dynamic leader.

Matt continues to grow his business to new levels of successes.  He has been able to build an organization around a group of individuals who share a similar business philosophy and mind set.   He continues to make a very comfortable income and is having fun doing it.

Keys

The keys to effective and appropriate positional bargaining are:

  • An objectively defined sum or task that is being considered
  • Emotions and a continuing relationship are not important
  • No other underlying interests or outcomes other than money
  • Trust and flexibility are not likely or even possible

Summary

Positional bargaining is a very useful and effective tool in mediation when individuals have either prepared or anticipated for such mediation, or in situations where one party might be in a particularly strong position and simply wants to draw a close to the business relationship.  Most often, the preferred style is the interest base negotiation where parties are moved from rigid positions to a more flexible one, where both parties win. 

Reader, please share how you have utilized this method of negotiation to resolve business conflict and create your win-win solution.

“Everything should be made as simple as possible, but not one bit simpler.”

                                                                                                            Albert Einstein

 

Reader, what does the above quote mean to you in regards to negotiating conflict?

Next week: Interest Based Negotiations.