Getting Ready for Due Diligence: A Must-Dos Checklist

Getting Ready for Due Diligence: A Must-Dos Checklist

Every business owner knows that due diligence is a critical part of the investment process. It’s a comprehensive review process that potential investors undertake to evaluate the feasibility and potential risks of investing in a business. But, due diligence can be a daunting prospect, especially for first-time business owners. This is why advance preparation is critical to make the process as painless as possible.

Here are some must-dos that every business owner should consider when preparing for due diligence.

Conduct an Internal Review

Before commencing due diligence, conduct an internal review of your company’s strategic plan and financials. This ensures that you have a detailed understanding of your business’s strengths and vulnerabilities before any third-party looks into it.

As a part of this review, consider the following:

  • Is your business strategy consistent with your financials and operational execution?
  • Do the financials agree with your accounting system and reflect accurate and consistent year-over-year results?
  • Are processes in place to secure the business’s intellectual property and sensitive customer data?
  • Is your business compliant with federal and state regulations, including labor and anti-discrimination laws?
  • Are employee policies, contracts, and benefits agreed with current laws and regulations?

Get Your Financial Statements in Order

Get your financial statements and documentation in order before a potential investor requests them. Ensure that they include:

  • Profit and loss statements
  • Balance sheet
  • Cash flow statements
  • Tax returns
  • Debt agreements and loans
  • Any potential liabilities

To make this process as smooth as possible, it’s essential that your documentation has accurate and consistent data, and it’s organized in a way that makes it easy to read. For this, you can seek help from financial advisors or accountants.

Ensure Your Corporate Records Are Updated

Ensure that all corporate records, including shareholder registers, articles of incorporation, and bylaws, are up to date. This step is critical for start-ups that may have gone through several rounds of funding. If your company uses a cap table to manage equity, ensure that it’s up to date and reconciled with your financial statements.

Assess Your Legal Agreements

Legal agreements are another critical component for due diligence. Review and understand the terms of all legal agreements and contracts that your business has engaged in. These could include:

  • Rental and lease agreements
  • Employment agreements
  • Partnership agreements
  • Service or vendor contracts

Make sure the agreements are up to date, legally binding, and reflect the latest changes.

Prepare a Data Room

It’s always beneficial to create a data room in a secure cloud-based location containing all documents that potential investors typically request as a part of the due diligence. Make it easy for investors by organizing it by categories, including:

  • Corporate governance documents
  • Financial statements
  • Legal agreements and contracts
  • Tax documentation
  • Licenses and permits
  • HR policies and compliance documentation
  • Marketing and sales documentation

By organizing the data room in this manner, it makes it easy for potential investors to obtain and review critical information quickly.

Final Thoughts

Due diligence is a vital part of the investment process, and it’s essential to be adequately prepared for it. Before going through this process, make sure that you’ve conducted a thorough internal review, have all financial and legal documentation in order, and have a well-organized data room. By taking these critical steps, you’ll be well prepared to provide the information investors need to make an informed investment decision.

So, be proactive, prepare for due diligence, and increase your chances of securing capital for your business.