Integrity Due Diligence

Integrity Due Diligence

Why IDD?

In today’s fast-evolving business environment and in a world in which commercial ideas and investable businesses, investors find themselves drowning in several layers of legal, technical, financial, and commercial due diligence to assess the viability of their investments. Yet, to a large pool of investors who put funds in startups, some critical assessments related to the integrity of the company’s stakeholders remain to be overlooked or treated with a light touch.

Early identification of integrity risks along with financial, legal, corporate governance, environmental and social, and compliance-related due diligence should be an essential component of any assessment of an investment opportunity.

What is IDD?

Integrity due diligence focuses on identifying risks regarding a business’s direct owners, ultimate owners, hidden beneficiaries, management, and clients, that are generally not revealed through other due diligence processes. As a result, it enables you to reduce risk, make informed decisions, pursue opportunities and manage difficult situations with greater confidence. This is similar to the “Know Your Customer” process that banks adopt while onboarding a new customer.

Integrity risk is the risk of engaging with external institutions or persons whose background or activities may have adverse reputational and, often, financial impact on the investor. Integrity risks include, but are not limited to, corruption, fraud, money laundering, tax evasion, lack of transparency, and undue political influence. To safeguard their investments, Investors should pay close attention to potential integrity risks as they may undermine the return on investment or adversely impact the business’ ability to carry out its business effectively.

Who is subject to IDD?

Entities and individuals whose role in a project could potentially adversely impact the investment are subject to the IDD process. This typically includes the key shareholders and their ultimate beneficiaries, board directors, and senior management. In addition, to be prudent, it is often necessary to conduct IDD on other parties, including co-investors, contractors, agents, advisors, consultants, suppliers, and other service providers.

How is IDD conducted?

Identification: As a first step, integrity risks related to the company need to be identified, including the entities and persons involved, utilizing open sources of information from the public domain, such as news and piece of relevant content in several pertinent languages as well as information from direct contacts through market intelligence and investigative methods. Information can also be sourced from governmental entities, security agencies, and private investigation firms. This stage tends to investigate key areas of integrity concerns; fraud, corruption, sanctions, political exposure, or misconduct of its various types.

Evaluation: The next step is to evaluate and assess integrity risks, including a thorough review by the investor’s internal risk/compliance department or through independent specialized risk consultants. The outcome of this process is to generate an IDD report that ranks integrity risks, scores them, and assesses their impact on the investment now and in the future.

Monitoring: As a final step, should the investor decide to move ahead with the investment, and as an ongoing exercise, the investor should keep monitoring integrity matters for new issues and changes in integrity risk over the life of the investment.

Why Should You Start Investing Now?

Why Should You Start Investing Now?

Amid the current global economic situation and the impact it’s currently having on inflation, declining purchase capacity against rising prices, and our lives, you usually tend to ask yourself one question; Should I continue spending, or should I save? Of course, if you ask economists, they would tell you to be safe at this troubled time and deposit your excess cash in a bank rather than spending it on overpriced commodities.

Investing is an effective way to put your money to work and potentially build wealth. Depositing your money in a bank is a minimal-risk investment that ensures your capital maintains its value against inflation. Yet, with the current crazy inflation rates, it’s becoming, to a certain extent, ineffectual, with inflation growing at a faster pace against bank interest.

So, bank deposits are only part of the story. Savvy savers start by building sufficient emergency savings within a savings account or investing in a money market account. But after building three to six months of easy-to-access savings, investing in the financial markets, startups, real estate, and similar investment vehicles offer many potential advantages.

Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff. In simpler words, a higher-risk investment usually yields a higher return.

Taking a step back, there are two ways to make money in our modern world. The first way is to earn an income by working for yourself or someone else. The other way to grow your fortune is to invest your assets so that they increase in value over time, depending on the risk grade of your investment and the promised return.

Whether you invest in stocks, bonds, mutual funds, options, futures, precious metals, real estate, startups, small businesses, or all of the above, the objective is to generate cash. This can come in the form of increased value to the investment, dividend income, the sale of a business, or some other liquidity event.

Brown Dog Financial Planning lays down four main reasons, which we find to be straight to the point, as to why you should start investing:

1- Investing Makes Your Money Work for You

To earn more income, there are two ways to make money. Either you work for your money, or your money works for you. For example, you could watch it grow by investing wisely instead of keeping it in a bank account, offering minimal interest rates.

Investing doesn’t typically bring significant returns overnight, but if you are prepared to play the long game, there are rewards in store. It is better than your money decreasing in value over time, or worse still – being spent.

2- Invest to Beat Inflation

Due to inflation, it is an economic certainty that the money you made yesterday will buy you less tomorrow. For that reason, you must make your money grow and save it from being devoured by rising inflation.

3- Plant a Seed and Let It Grow

Intelligent people use their capital (however small) as a solid foundation to earn more money. You can do the same by investing and using your money as a tool to build wealth rather than earn it and then spend it. The power of compounding on that small starting amount can be incredible.

4- Plan Your Retirement

Retirement is a time to enjoy the fruits of your hard work, not to scrimp and save, and it starts with investing now. For this reason, it is wise to allow your money to grow so that when you retire, you have a good pot of money to enjoy your later years.

The bottom line, it’s never too late to become an investor. You may be well into middle age before realizing that life is moving quickly, requiring a plan to deal with old age and retirement. Fear can take control if waiting too long to set investment goals, but that should go away once you put the plan into motion. Remember that all investments start with the first dollar, whatever your age, income, or outlook. That said, those investing for decades have the advantage, with growing wealth allowing them to enjoy the lifestyle that others cannot afford.

8 Ways To Make Your Business/Startup More Attractive To Buyers & Investors

8 Ways To Make Your Business/Startup More Attractive To Buyers & Investors

Our network of venture capitalists and angel investors always tell us that the difference between a startup that is capable of raising funds and one that is not; is always evident. You must constantly think big if your business is serious and wants to scale and grow. If money helps solve the problems preventing your business from growing, you’re in an excellent position to start preparing yourself for outside investments. While it’s always advisable to start small and then grow, there comes a time when you will need funding to scale. A common mistake by most entrepreneurs is that they focus too heavily on the product rather than plans to scale and customer needs.

Raising money for your startup is no picnic, especially during current global market conditions. In a recent CB Insights report, international funding for startups fell by 23% in Q2 of 2022 from the first quarter in MENA, marking the most significant quarterly drop in deals in a decade. The challenging market conditions make it vital for your startup to be appropriately suited and prepared to become a fundable business.

You need to keep in mind that an investor looks at your business differently than you or your employees or customers would. How you are seen in the public eye, news outlets, or the PR around you is not the lens that an investor will solely use to evaluate your business. Investors are free from emotions in their evaluations and care about if and when a potential trade will generate a positive return.

To answer the question of if and when a potential business will generate a positive return, investors will look at four key elements :

  1. Planning & Strategy: it’s not enough to have a well-thought-out plan for what you want to achieve within the next five years. You need great clarity in how you will be performing your projections and how you will be spending your request (the ask breakdown, as most investors call it). A business with a detail-oriented strategy on how it will use the money will be more attractive to investors than a business with no absolute clarity on where the money will go.
  2. Data & Numbers: when Jeff Winer once said, “ Data powers everything that we do.” he was on point in how it translates to business readiness for investing. If your data and numbers are not well mapped and visually clear to understand, you risk coming off as unpragmatic and losing the strategic edge you want to show investors. Data is a massive area of what investors look into when evaluating your business; no one cares about projected subjective numbers; crunch your numbers and crunch them hard before approaching any investor.
  3. Competitive edge: Investors are always searching for the next best thing. They want to see ideas that will separate, have compelling, unique selling propositions and are not lost in the crowd.
  4. Team compatibility: Your team is one of the most significant assets investors will evaluate. Some investors will invest more in people than ideas; having a solid and talented diverse team will ensure you capture the investment you need, and it can make or break your ability to find the necessary funds.

Below are some ways you can make yourself and your business more attractive to investors and win them over within all of these four key areas:

1. Choosing the right investor

One of the most important things to remember when preparing your business for investors is to choose the right type of investors; to do so; you need a game plan before approaching these potential investors. If you select multiple investors that are not interested in your product or vertical, you would be burning your chances and wasting precious time.

2. Mind the tunnel vision

Many entrepreneurs fall into the “aha” moment when they think they have stumbled on an idea that will become the next giant unicorn in a few years, and all they see is what they want to see rather than what is happening in the market. Avoid what is known as “Tunnel vision”, being stuck on how great you think your business will be and missing the pitfalls or gaps that investors can point out once you start approaching them.

3. Have proper financial records

The basic notion of why accounting was invented is to help management and investors understand the Company’s financial position and make informed decisions accordingly. Having proper financial records of revenues, costs, capital expenditure, salaries, taxation etc., as well as developing audited financial statements in the form of Incstatementsment, Balance Sheets, and Cash Flow Statement, help assess the accurate valuation of your company and ensure its business continuity. For more information on this area, you can download our e-book (here)

4. Have a clear USP (unique selling proposition)

Your idea may be great, but without a clear and unique selling proposition, it will not stand out to your customer segment or appeal to potential investors. They are not looking for ideas just to generate cash flow; they want to see that you can stand out amongst direct and indirect potential competitors. There are no simple recipes for creating a USP, but below is a great way to start :
We help [target audience/niche] achieve [specific, quantifiable benefit] using [unique mechanism] so that they don’t have to [pain you help them avoid].
You can also download this template from Hubspot to help you visualise and plan how you want to frame your USP.

5. Research investors before meeting them

Most serious investors will want to know how much you have already raised, so it would be wise to have your eye on investors with rapid succession. In addition, you should be smart enough to keep an eye out for investors with an excellent match to what you’re asking for. It’s not just about quantity but quality matches. Researching potential investors is the best way to measure this match. You can do so by reading their blogs/tweets on social media and reaching out to other members in the ecosystem who are in contact with the potential investor you are researching. Do your homework and dig in. Understand what stages these investors are interested in investing within and which verticals they prefer. The more time you spend doing this exercise, the better prepared you will be before meeting a potential investor, you will have a better list of potential investors to approach, and finally, it will give you the chance to create a list of possible questions they will be asking.

6. Make your asks realistic

No investor wants to hear from you if you have unrealistic or poor explanations of asks. Make sure you have clear visuals and content for how you want to present your ask to an investor. You can do so by linking each part of the ask to a specific business goal and linking all these goals to your overall vision. Make your ask cut-throat and unnegotiable as much as possible by doing your internal and external research to understand current and future market trends that can impact your business performance. You should also clearly highlight your ask’s impact on the business and how it will shape future growth plans.

7. Ace your PR game plan and public traffic- branding

You would be highly mistaken to think that potential investors will not be researching your business and brand just as you are studying them. You are having both your personal and business brand covered from a digital and social point of view can make or break your ability to attract and retain investors for your business. A great way to maintain a sustainable competitive advantage in this area is to have an in-house or outsourced team helping you with your PR & media coverage. Depending on the vertical you work in, you should be able to determine the frequency, which type of content and time frames would be best suited to achieve the best possible results.

8. Have a story and make it good

Have a story and make it good
Do not underestimate the power of a good story. Storytelling can help you translate your business ask and your success progress to investors clearly and captivatingly. Your ability to have a story behind your business will give it an edge that is attractive to your market and potential investors. Whether you are comfortable with storytelling or not, we are all storytellers. You don’t have to be great at it and don’t have to like it, but you have to get it done. Nothing will beat a good story that taps into emotions when talking about your business. Storytelling for startups is essential to your marketing strategy as an entrepreneur. To learn more about this specific point, keep watch for our upcoming podcast and article on “The power of Storytelling for Startups”.

To sum up, you need to have all your cards ready before approaching potential investors, don’t take a blind leap of faith in this account; instead, have all your homework ready from all aspects of your business. Your pitch, its content, who you will be approaching, when you will be approaching them and how; can all impact the outcomes of your ability as a business to win over and keep investors interested in your industry. Take your time in the preparation phase and give yourself ample trials before the real deal; speak to trusted mentors and advisors to get all the needed feedback about your story and pitch. Finally, remember that if one investor or more is not buying your pitch, it certainly does not mean you don’t have a viable and high-potential business. It means you must keep adjusting and perfecting your story; the right investor will soon come to buy in.

It’s crucial that all startups understand the M&A scene and how they can be better prepared for its opportunities. Here is a guide to help startups achieve just that!

The different methods for valuation of your business

The different methods for valuation of your business

Valuing a business is anything but a precise science. A company is ultimately worth what someone is willing to pay. Even that will vary over time depending on liquidity availability and prospects for the future as viewed by potential buyers. Business valuations have been rising over the last 10 to 15 years, for example, US businesses under $1bn in revenue have increased sales prices by nearly 50% over the previous 10 years. European businesses have also increased their achieved prices by a more modest 10 to 20%. This reflects corporate and private equity’s ‘dry powder’ or cash waiting to be spent and the ease with which funds can be raised. In both cases, this has increased substantially over the period discussed.

Potential buyers’ value depends on what you can do with a business to increase cash production. This may involve merging with current operations to create economies of scope and scale, investing in new products, accessing new market segments, or using technology or patents acquired with the business. Hence the valuation depends on assumptions about the exploitation of future opportunities.

In that context, Buyers often apply several valuation techniques to help capture the business’s fair market value. Such strategies revolve around four main approaches; the intrinsic value approach, the market approach, the cost approach, and the asset-based approach.

  1. Intrinsic Value Approach (Discounted Cash Flow Analysis “DCF”): This is the most thorough way to calculate the value of a company. When assessing the value of a potential target, virtually all potential acquirers build a discounted future cash flow model of the business, which evaluates and makes assumptions about cash needs and production in coming years. This will reflect future investments, cost savings, increased sales, potential disposal value, and initial purchase consideration. 
    A DCF analysis is performed by building a financial model in Excel and requires extensive detail and analysis.  It is the most detailed of the three approaches and requires the most estimates and assumptions. However, the effort needed for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the buyer to forecast value based on different scenarios and perform a sensitivity analysis. The discount rate is the cost of capital for the buyer or the Weighted Average Cost of Capital (WACC) to make this investment.
  1. Market Approach (Multiples & Comparable): The market approach is the most common valuation approach if comparable data is available. It has two main methods, comparative analysis & precedent transactions. Comparative company analysis (also known as “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar companies by looking at trading multiples like P/E, EV/EBITDA.  A widespread means of establishing a ‘ballpark’ valuation used by private equity and corporates is the EBITDA multiple (that is, earnings before interest, tax, depreciation and amortisation multiplied by a figure commonly used for that industry or firms with similar ‘value characteristics’ and typical of recent past transactions) that could be taken to mean similar risk levels and growth rates.
    Another type of valuation that relies to a certain extent on multiples is the comparable transaction methods. To use this method, you look at comparable transactions in that industry to a business with a similar model. You then compare them with relevant ratios and multiples such as Enterprise Value-to-EBITDA. With the precedent transactions method, you are looking for a critical factor that helps to determine the valuation. To do this, you compare the financials of similar companies and try to find a multiple that closely predicts the valuation. Once you know that, you can use that multiple to value the company being considered.
    Another prominent application of the intrinsic approach is the dividend discount model (DDM). DDM is a quantitative method used for predicting the price of a company’s stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to its present value. It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and considers the dividend payout factors and the market expected returns. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa.
  1. Cost Approach: The cost approach, which is not common in corporate finance, looks at what it costs to rebuild the business. This approach ignores any value creation or cash flow generation and only looks at things through the lens of “cost = value.” Another valuation method concerned is the ability to pay analysis. This approach looks at the maximum price an acquirer can pay for a business.  
    For example, if a private equity firm needs to hit a hurdle rate of 30%, what is the maximum price it can pay for the business? If the company does not continue to operate, a liquidation value will be estimated based on breaking up and selling the company’s assets. This value is usually significantly discounted as it assumes the assets will be sold as quickly as possible to any buyer.
  1. Asset-Based Approach: An asset-based approach focuses on a company’s net asset value. The net asset value (NAV) is identified by subtracting total liabilities from total assets. There is some room for interpretation in the valuation and how to measure the weight. Many stakeholders will also calculate the asset-based value and use it comprehensively in valuation comparisons. 
    The asset-based value may also be required for private companies in certain types of analysis as added due diligence. Furthermore, the asset-based value can also be an essential ratio when a company plans a sale or liquidation. However, this approach may not apply to tech startups with a light asset base and rely mainly on the productivity of their tech assets as the primary source of value.



What are the different types of Exits?

What are the different types of Exits?

So you have reached a point where you want to reap some of the hard-earned efforts you have put into what has been your dream as a business founder, and you’re deciding to Exit. Regardless of the type of Exit you are looking to go through; you probably have a lot going on your mind. From deciding on the right buyer, the ideal deal, the timing, the legal & financial jargon, the expenses you may have to incur and not to mention the changes that will most likely impact your team during this transition. So what exactly is an “Exit Strategy”, and what are the different Exit strategies available to you as a business owner or founder?

An Exit strategy for a business “is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company”. Exit strategies allow business owners to reduce or liquidate their stake in their business and make a hefty profit if the company is successful. In simpler terms, an Exit strategy is your plan for what will happen when you want to leave your business. The strategy explains how you want to transition and outlines a guide similar to how your business plan is written for when you started the business. Your decision to Exit does not mean your business is losing or there is an imminent threat or disaster at bay; the opposite is, in fact, true- some business owners enter a business with a plan to Exist after a certain period and reap the benefits.

Exit strategies should be implemented at the very start of your business planning process, and a forecasted scheme should be outlined for all possible outcomes. There are 8 types of Exit strategies that a business owner can look to choose from depending on their financial situation and their needs from the Exit.

1.Merger and acquisition (M&A deals)
Considered the most popular strategy, M&As are specifically more attractive for startups & entrepreneurs. In this strategy, your business is either purchased by another business/investor or merged (becomes part of) with another company that shares similar goals and values. It can be processed through cash, equity swap or a mix of both. There are many reasons behind using this option, such as geographic expansion, gaining new talent, acquiring new product line or infrastructure or ridding yourself of competition. One of the significant advantages of M&As is room for negotiable pricing of the sale, which cannot be found in an IPO; for example, which valuates your business based on the industry. Still, the process can take a long time and easily fall out.

2. Initial Public Offering (IPO)
An IPO exit entails that you will be taking your business public and selling shares as stocks to shareholders. IPOs are the dream for many entrepreneurs to one day sell their business for a considerable profit to the public; however, within the world of small companies and startups, especially in our region), this method is not suitable for everyone as it requires multiple conditions. In addition, the high regulatory burdens and massive pressure from shareholders make staying private much more enticing. There is also the danger of evaluating your business if it is not found appealing to the public. Yet if you meet the conditions for an IPO, the skies are the limit in terms of gains.

3. Family succession
If you want to keep the business “in the family,” this is the ideal exit strategy for you. It can mean transitioning the company to a sibling, spouse, child or relative. It can be an attractive option for many because it allows you to take time to groom the next leader and avoid outside interference. Still, as a business owner, you need to remember who would be the best person for the job, not just who is next in line.

4. Liquidation
This option is usually chosen for a business taking a massive fall. You are choosing to close your business and sell all assets in this option. The cash earned from the sale of the business must be used to pay off outstanding debts. It may seem grim, but for some, it is the start of a new journey.

Selling your stake to a partner or investor
This option is only viable if you are not the sole owner of your business. In this case, you sell off your stake in the business to another partner or investor. The term ‘business as usual” is often used to describe this strategy.

6. Management and employee buyouts (MBO)
In this strategy, the people who are already working for you may be able to buy your company from you and transition from senior roles to leadership. Since they are already familiar with your business, they will be highly capable of running it when it’s sold to them. This strategy can result in a smoother and more loyal transition, in addition to having more flexibility in your involvement post-sale

7. Take part in an Acquihires.
In this strategy, a company is bought mainly to gain human talent. This can highly benefit skilled employees because they will be favourably looked after the business is sold. It differs from a typical acquisition because it’s based on the business talent at its core.

8. Declaring Bankruptcy
This is the only strategy that does not need a plan. If you are a small business or startup, you cannot plan for this type of exit strategy; you would have to be forced upon it when things go wrong. Like with all businesses, there is always a risk of bankruptcy when things take a terrible turn, but it does not mean the end of the journey for you as a business owner; it is a way to help relieve you of your business debts. With bankruptcy, your assets are seized, which would impact your credit, and you will need to understand fully, based on the market you are in, what other penalties may be at risk.

While this list outlines the basic well-known types of exits there more sophisttecated formats of exits stratgies such as SPAC (Special Purpose Acquisition Company) a relatively new exit strategy. SPAC is a company created to raise funds through an IPO to acquire another company and take it public. A group of investors forms a SPAC called sponsors, and it has a specific period of time to find a target company to acquire, while the funds are placed in an inters-bearing trust account. SPAC must also be registered within the relative Securities and Exchange Commission (SEC), based on its operating market. Currently, it’s more popular in the United States. If a target company for acquisition is not found within the set time period, the SPAC has to be liquidated, and the funds returned to investors. Thereare also LBO models ( leveraged buyout), this includes an acuqstion of another company using a loan. The axquring company takes the loan to meet the cost of acquisition for the company being acquiered. The assets of both the acquiring company and the company being acquierd are used as collaterals for the loan.

Regardless of your chosen strategy, there is no one-size-fits-all model, and you cannot look at success stories and then match them to yوour own when it comes to exit strategies. It would help if you decided which strategy is best for you, which will be determined by several factors which may change over time. The best you can do is to start planning early on which strategy is best for you at different stages of your business life cycle.

Look for our next article to help you decide on which strategy to choose based on specific questions you need to be asking yourself before choosing a strategy:

  1. Why are you pursuing the Exit (what is your goal from the exit strategy)?
  2. Who will be impacted by the exit strategy?
  3. How involved do you want to be after the exit strategy?
  4. What are your financial goals?
  5. Do you know what you are doing or need a sell-side advisory?

  1.  Investopedia, Adam Hayes, March 2020
  2., Types of Exit Stratgies 

SaaS Valuation Calculation

Valuation multiples for SaaS companies are at an all-time high, which is largely based on public company valuations and M&A transactions. When it comes to estimating private SaaS valuations, tools like profit and revenue-multiples can be useful.

4 reasons to acquire a business

Most companies follow a standard life cycle that takes them from introduction to the market at the company’s inception, through a growth period before they reach maturity. This point typically signals the start of a decline. For most businesses, their average growth rate tops out at around 15 percent. If a market is going through a growth period, perhaps this will accelerate. But it times of decline, businesses must look to take market share from a competitor to retain anything like this level of growth. For businesses looking to stave off their decline phase or maximize their period of growth, acquisition is an essential tool.

The Lean Startup: Build, Measure and Learn

The difficulty is that good ideas can be few and far between, and it can be challenging at first to distinguish a good idea from a bad one. Moreover, it’s easy to accumulate sunk costs from pursuing a bad idea for too long. That’s why, when developing an idea as a startup or product team, we need to test, test and test some more.