Due Diligence: Deal or No Deal?

Due Diligence

Pooja Tekwani 
6/5/2020
Financial Due Diligence

“And his negative side, in many cases, I turned a blind eye, especially when it comes to governance.”

These were the words of Masayoshi Son, the man behind Softbank who lost more than $10 billion after turning a ‘blind eye’ to governance lapses at WeWork.

Investors buying into the herd mentality of the ‘next big thing’ or ‘go big or go home’ was partly the reason for this blunder. The other was the poor operational and financial due diligence. With rising cases like WeWork, due diligence becomes an inevitable process comprising of evaluating the following factors:

  • Industry Analysis & outlook: Product/Service Viability
  • Quality of financials and accounting process: Restatements, Adjustments, Working capital needs
  • Quality of business assets: Change in Asset values, Credit facility covenants
  • Financial Contingencies (if any)
  • Quality of earnings: Long term business sustainability

    With persistent lack of financials and historical data, it becomes tricky to evaluate a startup. Investors then turn their focus on the future prospects by evaluating the last two factors in depth. While Industry Analysis can be evaluated through secondary and primary research on the target market, Quality of earnings is more challenging to quantify. Nevertheless, it can be assessed for a startup by evaluating the answers to the following questions:

  • Whether the revenues are based on one-time or repeat customers?
  • Can the business concept be easily replicated? (Uber’s many rivals like Lyft, Careem and Ola)
  • Does the management’s network significantly impact the business concept and revenue?
  • Does governance of the business support the long-term vision of the company?

We live in turbulent times. In the midst of a global crisis with equity prices at all-time lows, temperatures at all year highs and a pandemic terrorizing the world, there are multiple invisible layers of increasing uncertainty that a business needs to wade through and it’s important to ensure that the surfboard is of good quality before one can ride the waves.