Gold Magazine September - October 2013, Issue 30 | Page 76

valuation

IN MANY COMPANIES, THE
REAL VALUE LIES NOT IN THE
ASSETS, THE PRODUCT OR THE
CUSTOMER LIST BUT IN ITS
EMPLOYEES
The financial records of many small
companies are often extremely limited. In
such a situation, the due diligence investigation should be expanded in an effort
to obtain the financial information necessary for a reasonable valuation. Limited
financial data may also impact the terms
of the purchase. For example, in a business
that has a large number of accounts receivable, without reliable financial statements,
the buyer may want to place a substantial
discount on the value of these accounts or
even require the seller to guarantee that
all or some of the receivables will be collected. At a minimum, the buyer will want
to conduct a more thorough investigation
regarding the nature of the receivables and
the customers owing the debt.

3. REVIEW ALL THIRD PARTY
CONTRACTS. The contractual obliga-

tions and rights of the target entity must be
identified for a proper valuation. Therefore,
the due diligence effort should include –at
a minimum – a review of the following:
• Franchise and licensing agreements
• Sales contracts or other contacts to which
the company is a party
• Insurance policies
• Agency, distributor and advertising
contracts
• Supply contracts

credit and instalment
purchases

• Government contracts
• All other material
agreements to which the
target company is a party

4. REVIEW
EMPLOYMENT CONTRACTS. In many companies, the

7. REVIEW ALL
LITIGATION FILES.

Information regarding
pending or threatened
lawsuits involving the target
company must be carefully examined. The buyer should also review any
administrative proceedings, governmental
investigations or inquiries.

Rakis
Christoforou

real value lies not in the assets, the product
or the customer list but in its employees.
Therefore, the terms of all employment
contracts for key employees, company
retirement and benefit plans, as well as
employee manuals and union contracts are
crucial to the success of any business venture and should be reviewed as part of the
due diligence effort.

5. INSPECT ALL INVENTORY. An
inspection of the company inventory is
obviously central to any business valuation.
Such an inspection should also cover all
fixed assets, motor vehicles and other assets
needing a recorded conveyance or change
of registration.
6. REVIEW ALL LEASES, DEEDS,
MORTGAGES AND LOAN
AGREEMENTS. The buyer should re-

view the following:
• Documents and agreements evidencing
borrowings by the target company, including loan and credit agreements and other
evidences of indebtedness
• Documents evidencing
mortgages, security interests
or loans on assets of the
business
• Guarantees, agreements to maintain
net worth and similar
agreements
• Agreements confirming
lines of credit
• Leases of real or personal
property to which the company is a party, either as lessor or lessee
• Documents and agreements evidencing other
material financing arrangements, including letters of

8. REVIEW ALL REQUIRED GOVERNMENT FILINGS. Various government permits and licences are often
required before a company may lawfully
conduct business, such as a sales or tax
permit. The buyer should ensure that all
required permits and licences have been
appropriately maintained.

9. REVIEW ALL DOCUMENTS ESTABLISHING THE LEGAL ENTITY
FOR THE BUSINESS. The buyer

should review any assumed name certificate, partnership agreement, shareholder
agreement, bylaws, articles of incorporation
and any other document establishing the
legal structure for the target entity.

10. EVALUATE ALL INTELLECTUAL PROPERTY. Lastly, the buyer

should never forget to evaluate all intellectual property, including any patents,
copyrights, trademarks, trade secrets and
goodwill.
As can be seen from the above, the Business Valuation due diligence process can
be extremely complex and often requires
the involvement of several legal, financial
and business professionals. That’s why I
prefer the term “Forensic Business Valuation” for such a process. Those interested
in purchasing or sell