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9.4 Prepare for Due Diligence
Up to this point in the financing process, the investor has relied
mostly on the information you have provided. But before committing to
the deal, the investor will conduct a due diligence review to verify
your information and to obtain more data, if necessary.
Every investor will perform the due diligence review differently. Some
will have advisors (usually from large accounting firms) perform the
task, whereas others, often angels, will handle it themselves. A due
diligence review will usually include a detailed look at these main
elements:
The information the investor wants is usually drawn from two sources:
interviews and documents. Interviews may be conducted with any or all
of the following: your management team; your banker, lawyer and accountant;
major clients or suppliers. Give these people advance notice that they
may be called on to talk with the investor.
Documents You'll Need to Have Ready
Do some groundwork in advance, and make sure that all the following
documents are readily available when needed. Assign responsibility for
ensuring good copies are prepared, and keep track of where they are
located in case a key person is out of the office when the information
is requested. Here are some documents you'll probably need. For operations
and technical review, consider what is appropriate in your case.
| Document Type |
Responsible |
Located/
Ready |
|
Financial Review
- published financial statements for the last four or five years
- company-prepared interim financial reports and analyses
- recent business income tax returns and payment schedules
- auditors' working papers and all pertinent correspondence with the auditors
- recent appraisals of tangible assets
|
|
|
|
Management Review
- a strategic plan that focusses on the big picture for the next 5 to 10
years and incorporates your vision of the company
- historical and future forecasts, along with actual figures, to assess
management's ability to produce accurate forecasts and to determine future
expectations
- all key management biographies and résumés
- an organization chart and copies of any employment, consulting
and confidentiality agreements with key employees
- a list of primary and backup suppliers (especially if you
buy a speciality product or service)
|
|
|
|
Legal Review
- corporate minute books and documents (e.g. articles of incorporation,
by-laws)
- summary (and copies) of the main contracts in place (e.g. shareholders
agreements, employment contracts, leases, patents, insurance policies,
mortgage documents, and sales or supply contracts)
- a summary of all outstanding or pending litigation with an accompanying
opinion letter from your lawyer explaining the expected outcome of each
lawsuit
|
|
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|
Marketing Review
- press releases, speeches by management and marketing materials
released in the past few years
- a list of key customers with historical and projected sales
data and order backlog, if available
- market due diligence
|
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|
Operations
and Technical Review
- if your company is a manufacturer, returns and warranty data
to assess the quality of the product and to assess any contingent
liability related to your products
- other
|
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Who Pays for the Due Diligence Review?
Sometimes the investor will require the business owner to pay for the legal
and due diligence costs. There are no laws or regulations preventing the
investor from asking this of you. Although every investor operates differently,
the bottom line is that you need the investor's money, so you may decide to
agree to pay if refusing could mean the end of your financing negotiations. If
you do decide to pay, agree on a time budget and maximum amount before the work
begins.
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