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| Published in: Succeed in business
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 Although due diligence is most commonly associated with the homework one company does on another before acquiring it, it also refers to the steps a business must take before coming to market.
The due diligence process is the last hurdle a company has to cross before listing
During the due diligence process, the company has to decide whether it has what it takes to make a success of the listing.
The due diligence tallies up all the research that is done during the preparations phase of the listing. This information has to be packaged into a prospectus and given to potential investors during the initial public offering (IPO) phase.
Investors obviously want the best possible value for their money and therefore have the right to know as much as possible about the business. Due diligence gathers all the relevant information for it to be packaged and communicated to the public.
There are many different reasons why a company might list, such as public awareness, expansion capital or mergers and acquisitions. Whatever the reason, one key factor influences the success of the listing more than anything else: preparation.
The reason many company owners dread the due diligence process is that it often uncovers gaps that the company needs to address. However, this can be a very healthy process that not only assists the company to continue to move in the right direction, but also puts potential investors’ minds at ease.
Although no legal definition exists for due diligence, it is understood to mean a thorough investigation into the way the company conducts itself at all levels of the business. This is done by independent professionals. The process requires professional input from financial and legal advisors, as well as technical advice from engineers and IT professionals. These consultants will help management to gauge the current health of the business and how the listing will affect the future of the company in terms of capital and ownership.
The AltX sets minimum disclosure requirements that companies have to divulge in their prospectus to become eligible for a listing.
The consultant is able to advise the company what potential investors expect and where the company is lacking in this regard. This information often leads to some tough decisions that need to be made, such as closing divisions that are not profitable and outsourcing that process. Sometimes, suppliers have to be changed to increase viability.
In addition, all systems such as control, accounting and reporting will be subject to scrutiny. The key personnel in the company are also assessed. In doing so, the company gains an understanding of who is adding value to the company to ensure that these skills are retained.
Of all the areas of due diligence, finance is the one that makes or breaks the company in the eyes of potential investors
The purpose of due diligence is not only to ensure that the company is sound enough to list, but also to budget for any eventualities in the near future. The identification of threats and the contingency plans that are put in place to deal with these are a sure boost for investor confidence.
Of all the areas of due diligence, finance is the one that makes or breaks the company in the eyes of potential investors.
The minimum requirements of financial disclosure are half-yearly income and balance sheets (including annual reports) for the three previous years and the current year-to-date, as well as the supporting schedules for these statements. If the company has more than one major product line, these schedules should be split according to product. Separate schedules should also be prepared for local and international markets.
Detailed account and inventory activity for this period must also be disclosed as well as the company’s tax history.
Although it may be a bitter pill to swallow at the time, due diligence sometimes avoids future distress by revealing that a company is simply not ready to list. The process allows for threats and weaknesses to be ironed out before the company releases its prospectus. Sometimes, the listing plan only needs to be shelved for some time until conditions improve.
Listing is similar to stock investing in the sense that there certainly is a right time to enter the market. Given the current adverse economic conditions, few companies are considering a listing.
However, listing lead times could be as long as 18 months and this may be an excellent time to do the company’s due diligence. Not only will it prove that the business can stand up to adverse conditions, but it will allow the company to have the foundation to go public when the time is right. Even if the decision to go public is not taken soon, the due diligence process can only contribute to the future success of the company.
For more information on taking your company to the AltX, we recommend A guide to AltX, where all the information in this series of articles is contained. It was written by Jacques Magliolo and published by Zebra Press. ISBN: 1868729044.
Areas of due diligence
- Financial statements – ensure accuracy
- Assets – confirm value, condition and legal title
- Employees – identification and evaluation of key personnel
- Sales strategy – analyse policies and current procedures
- Marketing – key value drivers and the effectiveness of company strategies
- Industry – understanding trends and new technologies in the playing field
- Competition – identification of threats
- Systems – efficacy of systems and whether they need to be updated
- Legal, corporate and tax – any issues that need to be resolved
- Contracts and leases – identification of risks and obligations
- Suppliers – Will they remain unchanged in the near future?
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