StartUp Leadership Program

January 30, 2016

Agenda

φ Typical FDD scenarios

φ Why – FDD is required
φ How – FDD is carried out?
φ What – are the pitfalls?
φ Typical FDD results
φ Staying ahead of the curve
φ Questions/Additions/Feedback
Due Diligence Defined

Due - Adjective [dyoo] Diligence Noun - [dil-i-juh ns]

Due diligence is an investigation of a business or person

prior to signing a contract, or an act with a certain

standard of care.

> Due diligence – a special purpose audit

> Financial Due Diligence – DD of the financial aspects of the company
> DD Vs. Audit
Typical FDD scenarios

Merger

Others Takeover/Acquisition

Asset Purchase
Joint Venture
Agreements

Venture Capital Private Equity

Why – FDD is required

φ Purpose of DD – φ Identify potential issues classified as –

φ Better understand the numbers presented in the φ Deal breakers

business plan – φ Others
φ Past data – customers, vendors, users, subscribers, φ Basis for price/valuation adjustment
sales, margins, accounting policies
φ Renegotiation of other terms and conditions
φ Future estimates

φ Understand org structure, reporting relationships,

people related liabilities etc.

φ Potential use of investment proceeds

φ Understand liabilities carried over from previous periods

φ Status of statutory compliances

φ Title and realizability of assets and claims

φ Historical cost valuation of intangibles (in IT scenario)

How – FDD is carried out?

Understanding
Reporting & the deal
Closure Client brief –
deal drivers

Identification &
discussion of Scoping
potential issues

Target Meeting
Analysis of
& Initial
information and
Requirements
data
List
Coverage of FDD

φ Reported Financials φ Internal numbers & reporting

φ Fixed Assets φ Budgets

φ Intangibles φ MIS

φ Current assets > customers, contracts, recoveries bank, φ Costing

investments, inventories φ Segmental analysis
φ Capital structures > cap table, rights and obligations to
shares, shareholders’/founders’ agreements, conversion of
securities

φ Current liabilities > vendors, contracts, liabilities

φ Revenues – geographies, products, segments

φ COGS

φ People liabilities

φ Taxes
DD for early stage startups

φ Burn rate & runway

φ Sweat equities, ESOPs

φ Full timers vs. part timers

φ Breaks in operations, if any

φ Cohesiveness of the founders and the founding team

φ Market potential, strategic fit

φ Board compositions

φ Providers and conditions of funds deployed in bootstrapping

φ Real customers

φ Business plan/end use of investment proceeds

What – are the pitfalls?

φ Misrepresented numbers – Customers, orders, vendors, deliveries,

margins etc.

φ Significant non compliance with applicable laws & regulations

φ Issues in end use of previously raised money

φ Fictitious capitalization

φ Overvaluation, typically at the backdrop of down round

φ Too many co-founders w/o any tangible roles & responsibilities

φ Too many liabilities carried over from previous periods eating up

significant portion of the funds being raised

φ Unregistered/unregisterable IPRs
Typical DD Results

Risk – Low to High

Valuation
Adjustments/Re
Dealbreaker
negotiate of
Terms

Costs – Low to High

Valuation
Adjustments/Re
Ignore
negotiate of
Terms
Staying ahead of the curve

φ Being DD ready –

φ Always helps to close the deals fasters

φ Gain investor confidence

φ DD isn’t rocket science – it’s common sense – best part is – you can predict the
process and outcomes of DD

φ DD Readiness involves –

φ Predicting possible deal drivers

φ Track key matrices relevant for the industry

φ Availability of Dependable Reporting Systems

φ Staying clean on statutory compliances, related party transactions, corporate

governance structures (wherever applicable)

φ Broken deals are the best advisors for what to have and what not to…
Profile – CA Prasad Bhalerao

Prasad is Founder & Director with Prossure Consulting Pvt. Ltd. whose core purpose is to
help businesses take sound financial decisions and implement them. Prasad manages the
advisory & outsourcing practice at Prossure. He works on engagements of internal controls,
valuations, due diligence, and +CFO – a comprehensive outsourced CFO program including F
& A outsourcing & making companies growth ready. He is a qualified CA, CS and CISA. He
holds a Certificate in Business Valuations from Aswath Damodaran (Professor at Stern School
of Business at New York University); Certificate in Mergers, Acquisitions & Restructuring
from IIM – Ahmedabad and Certificate in Enterprise Risk Management (ICAI – India). He
possesses working/auditing experience of 8 years with/for large stock exchange listed
companies as well as small and medium owner managed businesses. He has worked with
Bharat Petroleum Corporation Limited prior to Prossure Consulting. In personal life, Prasad
likes playing badminton and cycling.
+CFO by Prossure

+CFO by Prossure is mission to enable businesses make sound financial decisions and
implement them with the power of #Do. +CFO is a team of execution focused people who
believe in “Do”. +CFO helps its clients to turn their visions into action with its unparalleled
quality execution capabilities.

#Do +CFO helps startups stay lean by helping them with outsourced/co-sourced accounting,
taxation, secretarial, statutory compliances with its exclusive program, ezboox. Plans ezboox
are modular to the needs of startups and are very cost effective. ezboox comes with zero
interest and penalty guarantee.

+CFO also supports startups in their financial decision making and transaction support by
acting as their extended CFO.
 Prossure Consulting Pvt. Ltd.
# 2, Narhar Prasad, Next to Reliance Digital, Gulmohar Park, ITI
Questions, Additions, Feedback? Road, Aundh, Pune 411020
08380 838 838| [email protected] | prossure.com

twitter.com/PlusCFO

January 30, 2016