The key purpose behind it is to identify any black holes and to provide comfort that the information provided is accurate and not misleading.

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1 Due diligence

2 Foreword Diligence is defined by the dictionary as done in a careful and detailed way. Funders (be it Bank or Venture Capital) or parties looking to acquire a business will all require at least some due diligence before they will release any money or proceed with the purchase. The key purpose behind it is to identify any black holes and to provide comfort that the information provided is accurate and not misleading. Due Diligence also adds value in a number of aspects: it flushes out additional information to allow better tailoring of the warranties and indemnities it helps identify the true underlying cashflows and earnings, as well as key drivers behind the business it helps identify possible post-completion issues be it integration, marketing, organisational, control or systems related it also helps justify the price (or not!) As a full service accountancy practice we offer joined-up access to other areas in which you might require advice and can draw upon the expertise of our in-house tax and financial planning experts, if required, in structuring and planning transactions. We offer a full range of services to help you achieve your business ambitions and measure our success by your success. Critchleys experienced Corporate Finance professionals have the expertise, contacts and commercial acumen to effectively negotiate and conclude deals - and an impressive track record to prove it. We are committed to providing sound commercial advice to the mid-market, and have particular expertise in owner-managed businesses and SMEs. Justin Ray Corporate Finance Partner

3 What is Due diligence? Due diligence is a central part of securing finance or acquiring a business and involves a thorough examination of the target, its products, its financial records, and the business plan with a view to validating the information in these documents and the opportunity. The purpose is to provide comfort that there is substance behind any assertions made, and to identify key areas of risk. Due diligence falls into the broad categories listed below, each of which should be undertaken by experts within that field. In addition to accounting and legal professionals there are organisations dedicated to providing commercial and specific technical due diligence. Financial due diligence Historical, current and anticipated future financial performance of the company is scrutinised in detail, to ensure that the company s income and expenditure are fully and correctly recorded in the profit and loss account and the assets and liabilities are correctly stated in the balance sheet of the statutory accounts. Financial due diligence also examines the quality of the financial information prepared for management purposes. Early stage investments may not have a significant financial track record and in this instance the expected future performance of the company is reviewed, and assumptions behind the numbers are challenged. Where relevant the work is closely compared with the key findings of technical and commercial due diligence. Tax due diligence The historical and current tax position of the business is important to understand to enable any risk factors resulting from any breach or failure of the business to properly record or pay tax, be it corporation tax, PAYE, National Insurance or VAT. A review of the tax affairs of the business will often help the lawyers structure appropriate warranties and indemnities to mitigate any financial or commercial risk arising from the historical activities of the business. Legal due diligence This process reviews the robustness of the company s legal and contractual framework. Areas addressed include employment contracts, statutory documentation (eg incorporation documents, board minutes etc), agreements with third parties (confidentiality, licensing, agency, leases, terms of business etc). The company is also investigated for potential litigation and the legal validity of any intellectual property is also assessed. Technical due diligence This is particularly relevant for innovative products and involves a critical evaluation of your product to ascertain its technical fitness and uniqueness or superiority over competing products. Your team and strategic partners will also be scrutinised to enable the investor to make a judgment as to whether they have the skill, experience and appetite to develop and improve the product effectively within its market, and within the both the physical and business environment.

4 Commercial due diligence The future profitability of any product is significantly affected by the market environment it enters and the purpose of commercial due diligence is to investigate that market focusing on key drivers of value for the product, principal areas of risk and forming an opinion as to whether the unit sales forecasts prepared by management are realistic. The report will include an investigation into the market in terms of current size, historic and anticipated future growth trends. The impact of competition is also considered in terms of both existing competition and the potential for new players to enter the market. The regulatory environment may also be taken into consideration, eg EU driven tightening of UK environmental legislation and its impact on the clean/green technology market. Customer referencing will often play an important part in the commercial due diligence process to verify the relationship and image that the business has in its market place. Care often needs to be taken to ensure that the right type of questions are asked so as to preserve confidentiality and not to spook any key customers.

5 Financial and Tax due diligence Critchleys Corporate Finance are experienced in both preparing financial and tax due diligence reports and guiding companies through the process when the due diligence is investigating them. When preparing due diligence reports our typical scope of work will usually include the following broad headings, but will be tailored to suit the specific requirements of each transaction. History & description of business history and development of the Company and the activities undertaken. the corporate structure of the Company and subsidiaries and associates. Commercial activities a description of the main business areas and products. an analysis of sales in quantity or volume, value and by outlet, including details of sales trends and product mix (as appropriate). a description of the customer base and an assessment of market share. terms of trade, including pricing and profit margin policy, credit arrangements, significant agreements for sales or purchase, agency agreements and exports. where relevant, details of firm orders outstanding by product line at the current date and details of fluctuations in the level of orders outstanding. details of storage and administration facilities and their utilisation. details of any distribution agreements. details of future strategy, any new activities planned or recently commenced or terminated. details of principal suppliers and relevant agreements and alternative sources of supply. details of advertising and promotional policy and expenditure. details of research and development programmes. Management and employees the management structure. details of the directors and senior management, including ages, qualifications, length of service and previous experience, and other directorships. remuneration of directors and senior management, terms of employment including details of service contracts, commission payable, benefits, loans and expenses, if applicable. brief assessment of management ability. details of personnel and management structure number of staff by area, wage rates, ages, union agreements, terms of employment, etc. Details of lines of command and group structure. broad details of workforce including terms of employment, numbers and remuneration policy. dates of salary/wage reviews and current position on such. details of profit-sharing and bonus schemes. staff relations and details of any trade union representation. details of pension schemes and indication of funding position. Accounting systems & management information

6 a description and assessment of the financial records, the management information produced and the system of internal control. a brief description and assessment of the costing systems and the budgetary control and forecasting systems. details of material year-end, non-recurring and other adjustments made to management accounts. Accounting policies details of the accounting policies adopted by the Company and details of any changes in policies during the last three accounting periods. Premises details of the premises, including location, form and terms of tenure, site area, current usage, date of acquisition, cost and subsequent expenditure. details of latest professional valuations. details of any impending or deferred repairs if material. Intellectual property rights details of all intellectual property rights held by the Company Name. Net assets a summary statement of the consolidated balance sheets as at the last three year ends. an analysis of and comments on the main assets and liabilities. details of any current, pending or threatened litigation or legal proceedings. details of any material long-term and/or onerous contracts. details of material contingent liabilities. details of major items of capital expenditure over the period and details of any outstanding capital commitments. details of capital structure, including a list of individual shareholders and distributable reserves. fixed assets, including depreciation policy, and details of any surplus assets. Details of any leased assets. details of banking facilities. summary of insurance cover. Taxation details of the current positions with regard to the agreement of taxation liabilities and assessments. a review of the position of HM Customs and Excise and the Inland Revenue in relation to VAT and PAYE, respectively. Trading results a summary of consolidated results for each of the last three accounting periods.

7 a breakdown of sales and gross profit contribution analysed by each main activity/product group with an explanation of the effect of any volume changes and any significant changes in margins. analysis of overhead expenses together with comments on significant fluctuations. an explanation of and comments on trends disclosed by the results, including relevant notes of any exceptional profits or losses, the impact of inflation, seasonal and any other significant contributory factors. Current trading review latest available management accounts. comment upon the accuracy of management accounts compared to the original budgets. where differences occur, are they as a result of poor budgeting, or a changed pattern in trading. Forecasts review the forecasts for the next 2 years. assess reasonableness of sales forecasts by customer and customer group. comment on gross and net margin assumptions by division. comment on working capital assumptions. carry out appropriate sensitivity analysis. are the accounting policies used consistent and those adopted historically? comment on all other major assumptions supporting the forecasts. has all tax either been paid, or provided for in the forecasts? Cashflow statements review of consolidated cashflow statements for each of the last three financial periods. General any other factors which might materially affect the prospects of the company and any other matters which appear relevant in the context of the current proposal. comment upon any auditors management letter (or similar) issued during the period. comment on accuracy of management accounts compared to final audited accounts. comment on accuracy of management accounts compared to original budgets. comment on the circumstances, which caused any material departure from these original budgets.