Many people would assume that for a business to be undergoing a due diligence process that a transaction must be about to occur – a merger, an acquisition, a divestment; but that is not necessarily true. Sure, each of these will trigger a due diligence process of some shape or form, but perhaps it’s time for us to broaden our understanding of due diligence and start to consider it as a diagnostic tool, one that will help us to be strategic in implementing a medium to long term goal, rather than only the immediate future.
Over the coming Newsletter issues we will consider some case studies where some level of due diligence is required. From simple appraisal to an in-depth analysis of the form and substance of a business.
Retirement Planning
A business owner, let’s call him Dave, starts to think about whether he has sufficient superannuation with which to retire comfortably and so he starts a conversation with you, his accountant or financial advisor. Based upon your assessment of his needs, it is decided that Dave needs a minimum of around $2 million in assets (other than the family home) at retirement in 5 years. Dave’s current superannuation balance is around $500,000 at the moment and he believes his business to be worth around $1 million, leaving a shortfall of $500,000 that Dave needs to accumulate over the next 5 years. $500,000 in 5 years will be tight, but it is doable if Dave is a little frugal and saves his pennies.
However, what happens if Dave’s business is only worth $500,000 when he retires in 5 years? Does it mean he can’t retire yet? Does it mean he has to retire with less than he really needs? Will it be Passion Pop and Kraft Singles rather than Moet and camembert?
When planning for his future retirement, a prudent advisor will do their best to make unknown risks into known risks. Often there is a disparity between what a business owner thinks their business is worth and what someone would pay for it in an arm’s length transaction. It’s only natural that you’d think your ‘baby’ to be more valuable than anyone else. As his advisor it might be perilous to question this value. This is the perfect time for the advisor to add value.
The prudent advisor recommends due diligence as a pre-emptive strike. At the very least it will determine what the business is worth today, but gives such insight as to allow a conversation with Dave to truly understand what drives the value of the business. The due diligence process could delve a little deeper to understand what could be tweaked to improve that value. Or deeper still and determine what changes could be made to the business that could unlock hidden value meaning that Dave could retire with $5 million in accumulated wealth rather than just $2 million.
To find out the value of your business or you client’s business please contact our team on 1800 436 742.
Brett Goodyer is a Director of SV Partners Forensics and our new online SME Due Diligence portal click here
Article written by Brett Goodyer, Director, Forensics