Capital facilitation, valuation and due diligence
The relationship between business valuation and due diligence is an intricate one. For a business owner or leader, business valuation is about the worth of your own company. Due diligence is an analysis done by one company to assess the value of another company. They essentially contain very similar details except that they are done by different parties and for separate reasons. One of the key uses for either of these type of valuation is to prepare and facilitate a company raising capital. A company looking to raise capital will need to present the value of the company and portray it as an investment for the interested parties.
What is business valuation?
Business valuation is the process by which the overall financial value of a company is determined. There are a number of methods used in determining a business’ economic worth. There are also a number of different reasons why the value of your entity is good information for any business owner to have in their resource files.
Why does my company need a business valuation?
There are three main reasons that business owners should be interested in obtaining the value of a company.
Selling your business
Knowing the value of your business is incredibly important whether you are in the market to sell your company right now or would consider the right opportunity in the future. It is always a good idea to have an established idea of the value of your company.
Attracting business investors
Growth is the name of the game for most small business owners. In order to fulfill goals of growth and market expansion, most business owners will more than likely need investors to help fund those plans. Having a solid business valuation is a key element to pitching and looking attractive to potential investors.
Related reading: how a fractional CFO can help fundraising.
Adding business shareholders
Another way to cultivate your business is to take on new partners or shareholders. Knowing the value of your company can help you determine the buy-in price for those individuals or partnerships.
Looking to obtain the value of your current business? Doing due diligence to acquire another company?
Business valuation for fundraising
Raising business capital
Capital investment is a key strategy for business growth. Any potential investor who might provide that necessary capital will want to see a thorough business valuation in order to best evaluate the potential success of their investment.
There are multiple, related pieces that will be involved in preparing for a business valuation and also raising capital:
A pitch deck is an actual presentation that business owners will deliver to potential investors. It includes the value of your business as well as many key financial elements that give an overview of your company. A strong pitch deck will help to sell a business as an attractive investment.
Business owners need to have a strong understanding of their place in the market. A market analysis provides detailed research of the industry in which you plan to offer your service or product. It includes industry information, target market, existing and potential competitors, available market and how you plan to create your own niche.
This is a two-fold piece:
- Prepare for the investor meeting. Visualize specific asks, open-ended questions to ask to start the conversation, and what information is important to offer them in this meeting.
- Prepare yourself for the investors. Read up (LinkedIn, AngelList, Mattermark, websites, social media) on the investors that will be attending the meeting. Likewise, scour these profiles for anything or anyone you might have in common. A word of reference can go a long way.
The business plan is a general blueprint for the business as well as how to execute on that course of action. The business plan can include other pieces mentioned here such as the market analysis or the financial model.
Financial modeling and projections
Simply put, a financial model is a tool that can help predict or forecast future financial performance. It is an invaluable tool to business leaders in giving them the insight that they need to plan both short and long-term decisions.
Strategic growth plans
This could be a part built into your business plan. A strategic growth plan addresses future plans for the growth of a company such as expanding the services offered, market location and more. Investors will want to know how their investment will grow in the future.
Overview of Due Diligence
Due diligence is typically an investment group, individual or company doing their homework. It is primarily used by one company who is seeking to acquire another company. There are upwards of two dozen types and approaches to this analysis, all of which aim to provide a clear picture of who and what may be encompassed in a business deal.
Due diligence process
This is the information that should be researched as part of the due diligence process.
General company information
This category might involve any number of factors about the company that is doing the acquiring. The acquiring entity should get information on everything from administrative factors such as facilities and overhead costs to human resources such as current employees and salaries, potential human resource issues, and existing employee benefits.
This is a key factor as well. Legal due diligence has a broad net to cast - it can include intellectual property such as copyrights and patents, articles of association, board and shareholder meeting minutes, material contracts and agreements, and any banking loans or financing contracts.
Business products and services
Often times, when a company is already looking to acquire a specific company, they are likely familiar with the products or services that they provide. However, make sure to also know other information such as inventory, projected sales, planned new products or services, and the scope of their current and expected clientele.
Market and competition information
Ultimately, this addresses the market for this company's products or services. The acquiring company should ask questions to find out if there are numerous competing companies. It is also important to know what sort of market share that the company realistically holds.
Due diligence checklist
A basic checklist of information to get as part of the due diligence process includes the following key items. It can also include any other key factors that might be specific to the company’s industry or situation.
- Overall corporate structure and general matters
- Financial matters including tax liabilities and notable assets
- Intellectual or technological property
- Legal contracts, pending litigation, regulatory and compliance matters
- Management as well as employees
- Customers and sales
- Insurance policies
- Environmental concerns.