Valuation and deals: Avoid throwing away value

Gyan, the business advisor was participating in an informal discussion at the fringe of a two day conference where many entrepreneurs were present. The discussion was focused around the sudden interest in M&A deals in early stage ventures and valuation of these companies. Mukesh referred to two companies which were being acquired and then spoke about one other company where the deal was stalled because of differences in valuation.

Gyan, "It is not about valuation alone, I understand that there were other issues, related to regulations and tax matters. Valuation is just one aspect of deals and growth in a firm. Many times, entrepreneurs look at business growth from the one dimensional aspect of valuation and ask questions such as what is the value of my company today? What do I need to do to increase this value? How can I create a valuable company etc..

The key aspect of tax and regulations is neglected or assigned to an advisor or service provider. The entrepreneur often takes the view that this is a small technical matter which can be dealt with easily. Many times these are the roadblocks which are irritants to deals or can actually dilute the final value of the business because they are not attended to in time."

Jim, "Yes, I agree Gyan, I have recently come across a company where the basic records were not maintained and this was obviously picked up in the due diligence review. The acquirer of the company leveraged on this in the negotiations and the result was that the founders of this company got 80% of what they had initially expected. In fact one of the founders was quite upset and said that their company unnecessarily lost out on the deal as they were unprepared when the due diligence was done. While they were following all rules and regulations, they tripped when they did not take care of some basic requirements, which were actually so simple to adhere to and follow."

Gyan, "I know, this is really simple to follow. For those of you interested I can send across an initial set of documents that you could keep filed and ready for review in case someone is looking at your company for investment/acquisition."

This is the basic list and starting point of documents that could be kept available for review. It would help if a separate file is created for this purpose.

  • Accounts and annual returns from the time of Incorporation of the Company till date
  • Memorandum of Articles and Associations
  • List of registrations – i.e. VAT, Service Tax, PAN, TAN, Import Export Code, PF/other labour law registrations, local registrations under Shops and Establishments Act etc.
  • List of Registers maintained – such as Fixed Assets Register, Register of Minutes, Register of Shareholders etc.
  • List of Bank Accounts with details of who is authorized to sign and limits of signature if any
  • Insurance details
  • Organisation Chart
  • Capital Structure of the Company
  • List of Contracts and Agreements signed – with investors, other shareholders, vendors, customers, employee contracts etc (i.e. non-compete) etc.

This could be the starting point of an internal check. Do you have these basics in place in your startup venture?

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