First of all, the Investor will perform a due diligence process, based on their risk tolerance level.
However, you need to see the due diligence process as part of your personal business development and a free way to improve your business. Also, you need to try to look beyond the personality of the investor.
Rather more on what they potentially have to offer the business in terms of credibility, knowledge and expertise. The Investor will complete a due diligence process after a company successfully completes the pre-screening stage.
This will include the following three steps.
Step1. Screening due diligence process
This stage is to determine if you have an investable business concept.
Bear in mind each investment opportunity can be subject to a rigorous assessment process and Investors will most likely be looking at some or all the following areas:
The problem: what problem does your product or service solve?
The solution: a working prototype of your product or a sample of your service
The value proposition: the world needs your product or service.
Disruptive market: what is the potential market size and growth opportunities that will provide the investor with a 30-50% annualised return on their investment in 3-5 years on exit. What are its limitations. What are the wider economic, social, environmental and or political motivations that are influential on the business opportunity.
The business model: is the business a viable investment is it profitable, is it sustainable and not just a fad.
Barriers to entry: what will stop competitors entering the market while fending off copycat competition.
The team: credible team, expertise, technical and functional skills, coachable willing to learn quick and adapt.
Resources: equipment, facilities, finances, resources and the ability to expand quickly without being restricted by staff. Key external parties including subcontractors who you will need to work with to successfully execute the business strategy. What are the current relationships with the partners. How will relationships with partners change when the plan is executed?
The deal: Investors want a deal that will make the required return on exit.
Step 2. Business due diligence process
Investors by this stage already believe in the business opportunity. Investors need to now support the facts presented. They are looking to support the business plan with financial and operational information…
As part of the financial audit you will want to have ready:
Financial statements: a minimum of a current balance sheet, up to 3 years past and projected P&L’s and three years projected cash flow.
Tax returns: past two years tax returns
Payroll records: Investors want to see that you are up to date with your employee obligations.
Books and records: bank statements, booking records to make sure you have no outstanding liabilities you have failed to mention.
Under the operation side of your business they want to see that you can complete your business plan as promised. They will want to speak to team members, customers and suppliers.
They may want to also look at:
Operation manuals: detailed operating processes, inventory process, how you deliver your processes.
Current customers: a customer list that backs up what you have done so far. Proof of customer satisfaction.
Employees: backgrounds of your past and current staff members, and more than likely 1-1 interviews.
Step 3. Legal due diligence process
Investors will need to know if the business has any legal issues you have not disclosed. If you have a Patent which is only valid in certain countries this could affect the valuation of your company. Or worst still if you only have a trademark, when you thought you had a Patent.
One more thing I forgot to mention is judgments…. If you have any judgements which you forgot to mention this could end the opportunity of any deal.
Make sure you have the following ready:
Contracts: agreements and nondisclosure agreements: all legal contracts you have in place with other businesses, employees, investors.
Licenses: any licenses that you need to run your business
Lawsuits: claims, judgments or regulatory violations: documents that support any legal actions
Intellectual property documents: proof of trademarks, patents, copyrights that protect your intellectual property
Corporate entity documents: proof that you have legally incorporated the business.
First of all, do not view the due diligence process as an investigation. Rather a stage in which two parties can start to build the foundation of future working relationships.
You may also want to check out my article on business valuation.
or Investor alignment depending on where you are in the process.
Are you ready to inspire your audience and make your business dreams a reality! I have written this training course ‘Pitch Your Idea’ for anyone seeking investment… Learn the art of storytelling, how to refocus your mind and the art of inspiring the audience.
- Gordon Bing – Due Diligence Techniques and Analysis: Critical Questions for Business Decisions
For anyone involved in any phase of the due diligence process, Gordon Bing provides a unique, comprehensive, one-volume source of information and guidance. His book will help investors research, evaluate, and understand an existing or proposed business not only from a financial standpoint, but also from equally important nonfinancial standpoints. It provides a full explanation of the due diligence process, including systematic methods to determine the information you need, why you need it, and how to get it.
- Peter Howson – Checklists for Due Diligence Designed to help you make your due diligence process as smooth and effective as possible, this collection of checklists by acknowledged expert, Peter Howson, will ensure you manage the risk aspects.
- Wendy Kipling – How to Write a Business Plan that Gets Results When it comes to business planning, still lots of business owners do not have one. In other words, they do not have a system to follow. Writing a business plan isn’t just a good idea. It’s a necessity. They aren’t just ‘one-time’ tasks. Business plans detail the income activities contributing to business success. In this step by step guide I will show you how to write a winning business plan.