Due Diligence And Valuation Check List

Charles Hattingh valuation buzzValuation Buzz series is written and published by Charles Hattingh CA (SA)...

Objective

A participant joined the valuation workshop to understand how to perform a due diligence exercise on a business and how to value it as she was tired of working for others and wanted to do her own thing. She needed a quick check-list rather than the detailed one in appendix 2 of the material. So, here we go. Anything to add?

Due Diligence and Valuation Check-list

Financial

  1. Past audited financial statements – up to five years
  2. Legal nature of operation (Ltd, Pty, cc, etc.)
  3. Audit firm and partner on the audit
  4. Sources of funding and security/guarantees given
  5. Details of shareholders and shareholder agreements
  6. Accounting function and systems in place
  7. Level of compliance (CIPRO, tax, BEE, etc.)
  8. Any lawsuits on-going
  9. Business plan and period in business
  10. Whether operations profitable and sustainable
  11. Value drivers and major risks
  12. Non-core assets and liabilities on balance sheet
  13. Budgets and projections
  14. Dividend policy

Premises

  1. If owned, how financed, condition, value, etc.
  2. If rented, leased, agreements – period, escalation, etc.

People

  1. Key Management and Staff Structure
  2. Names and qualifications of key managers
  3. Experience and special skills
  4. Remuneration structures
  5. Board of directors and corporate governance
  6. Restraint agreements in operation
  7. Relations between staff and management
  8. Relationships with unions, if any
  9. Periods of employment and retrenchment arrangements
  10. Accumulated vacation owing
  11. Post retirement benefit arrangements

Products and Services

  1. Period been in business
  2. Nature of products and services
  3. Share of market
  4. Brands and intellectual property created
  5. Pricing of products and services
  6. Order backlogs
  7. Product and service substitutes
  8. Major competitors and substitute products/services

Customers and Clients

  1. Main customers
  2. Concentration and spread of customers
  3. Customer contracts in place
  4. Customer turnover
  5. Customer servicing and retention
  6. Pricing policies
  7. Payment terms and relationships
  8. Marketing, public relations, advertising initiatives

Suppliers

  1. Suppliers of materials and services
  2. Supply contracts in place
  3. Alternative supply sources
  4. Payment terms and relationships

Plant and Equipment

  1. Nature and condition thereof
  2. Remaining lives, capacity and replacement costs
  3. Suppliers thereof
  4. Guarantee contracts
  5. Servicing agreements

Working Capital

  1. Levels and condition of inventory
  2. Replacement prices of inventory
  3. Stock takes, slow moving, obsolete, NRV
  4. List of receivables and ageing thereof
  5. Credit terms and discounts offered
  6. Credit risk and bad debt experience
  7. Cash needed to operate effectively

Profitability

  1. Revenue in total and by segment
  2. Gross profit in total and by segment
  3. Expense ratio and major expense categories
  4. Margins – in total and possibly by segment
  5. Velocity (turnover of fixed assets and working capital)
  6. Tax burden
  7. Gearing – extent and cost – fixed or variable
  8. Returns on non–core assets
  9. Return on equity

Solvency and Liquidity

  1. Structure and debt equity ratios
  2. Liquid resources to continue in operation

Valuation

  • Input the balance sheet information and balance
  • Input the income statement information and balance
  • Balance the articulated statement
  • Project the capex requirements
  • Project revenue growth and profitability
  • Project working capital requirements
  • Project gearing – extent and cost
  • Project dividends, if minority
  • Run the valuation model
  • Perform reality checks and sensitivity to drivers
  • Run Monte Carlo

  • Use your initiative when doing a due diligence and not the check list. The check list is merely a back-up to ensure that you incurred all bases. It is not all inclusive.