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Slides from Connect Estonia seminar CONNECT WITH THE SMART MONEY, on August 29, 2006.
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Due Diligence
Nelson [email protected]
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“I should have done a lot more due diligence because a lot came out of the woodwork in the balance sheet in a very different light and I would never have invested. If I had to do it again, I would have dug deeper and not been in such a rush to put the money in”
Reality
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Post Investment Depression
• Wish I had:– Done more due diligence – 36%– Had more contractual control – 13%– Invested more – 8%– Not invested – 8%– Recruited more people – 6%– Monitored more – 3%
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Perception of the Deal Process
FindingDeal flow
InitialScreening
DueDiligence
ValuationNegotiation
Legals
MonitoringMentoring
Exit
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Due Diligence
Why do it ? The Investor -• To get to know the management.• Evaluate the opportunity against your
investment criteria / strategy.• To reduce your risk – find the “lies”.• Identify areas for focus – danger areas.• To make go/no-go decisions.
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Who does the Due Diligence?
• Lawyers?• Accountants?• Consultants?• The lead Investor?• Yourself?
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Scope of DiligenceMarket
•Size•Trends•Competition•Oppts & Threats
Technology
•Technical Risks•CompetingTechnologies•Product Mfr
IPR
•Patents•Trademarks•Know-How•Design Rights
Sales & Mkting
•Value Proposition•Business Model•Sales Forecasts•Routes to Market
People
•Mgt Team•Key Staff•Roles &Responsibilities
Operations
•Product Delivery•Customer Support•Systems & Controls•Health, Safety,Environmental
Finance
•Balance Sheet•Cash Flow•P&L •Mgmt Info & Internal Controls
Legal
•Staff•Premises•Suppliers•Customers
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Due Diligence – When?
• Before you get the Plan.– General Market Knowledge.– The Source of the Deal.
• When you read the plan.– Personal Fit.– Common Sense.
• When you meet the Management– Do they have “it”.
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Due Diligence – When?
• During Negotiations– What are Management like under stress?– Still a consistent story?– Are they listening?
• Before you Sign the Paper– Have a reality check
• Business Still on Track?• Deal still Sensible?
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Elements of Due Diligence
• Screening Due Diligence.
• Management Due Diligence.
• Due Diligence on Intangibles.
• Business Opportunity Due Diligence.
• Financial Due Diligence.
• Legal Due Diligence.
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Screening Due Diligence
• Quality of source, the plan, etc(Use of application forms?)
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Angel Decision Making
• Initial Screening– Personal Fit & Junk Filter (73%)
• Detailed investigation– Due Diligence (22%)
• Negotiation and Contracting– Only 5% get this far!
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Due Diligence on Intangibles• Not “Intellectual Property” – but -
– Focus, momentum, buzz, your gut feeling.– Will this be “Fun”?– Can you add value?
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Management Due Diligence
• Managements view of investors.• Their motivation.• Are they really Entrepreneurs?• Do they have a CEO?• Why will they be a successful team?• Can you add anything?
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Portfolio Fit?
• What will they be like after the deal?• How will they behave in the hard times?
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Business Opportunity Due Diligence
• Customers.• Business model / scalability / market
channels.• Can it make required rate of return / IRR?• Exit.
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Remember the Basics
• Technology is rarely the reason for failure.
• Sales and marketing areas of weakness– Many companies lack “polish”.
• The USA seen as a key market– but most Non US companies struggle with this.
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Financial Due Diligence
• Historical, Forecast & Present.
• Burn rate.
• How cash to be used – development or past failings?
• What did the last business plan promise?
• Is the next funding addressed in the plan?
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Legal Due Diligence
• History• Tax• Structures (EIS)• Litigation• IPR• Contracts• Staff
A link between Due Diligence and the Legal process –
•Warranties •Indemnities
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If it doesn’t feel right, it isn’t right.
At the end of the day
Whatever the Due Diligence Results Suggest:
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Investor ReadyReverse Due Diligence
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Gabriel or LuciferThe Companies Due Diligence.
• Basic Chemistry» Do you like them?» A balanced Board - match long term
needs of Co» Control demands reasonable» Distribution requirements reasonable
• Get References• Watch out for tyre kickers• Do they have the cash? – Follow on• Work with them before committing.
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Due DiligenceConclusions
• It’s an ongoing and continuous process.• It’s an evaluation against personal criteria.• Results will be evaluated in a personal
manner.• It should take a reasonable amount of
time.• Have a reality check before moving on.• It should be a two way process.• It provides opportunities for entrepreneurs.