For any entrepreneur and business owner, there comes a point when their business is running smoothly, profits look good, and they consider scaling up. This is the time to conduct your due diligence and get your accounts and documents in order before meeting with potential investors.
The due diligence process is when potential investors take a deep dive into your company to confirm that it’s a safe investment. They are interested in the long-term profitability of your SME, and they will be on the lookout for any red flags that might come up at this stage.
This process can be intimidating for even the most seasoned entrepreneurs and business owners. Fortunately, there are a number of ways in which you can prepare for this process and identify any potential sticking points. If you still feel out of your depth, there are many companies that you can approach in order to assist, such as remote accounting firms.
Here are four key areas that you can concentrate on when getting your company funding-ready.
- Finances
This is where you can expect the most questions and the most amount of homework on your part. During this part of the process, an investor will examine, question, and scrutinize your income statements. They will also look for proof that your past financial performance is accurate and that you’re following sound taxation practices. Any venture capital group will also examine your current business plan and your forecasts for the next few years to determine if the company is a solid investment. After all, it is future performance that matters most to them. Make sure your most recent financial statements, business plan and financial projections, and proof of tax compliance are up to date and ready. Keep in mind that bad bookkeeping means that there might be errors that could jeopardize your chance of an investment. Because this section is usually so detailed and requires 100% accuracy, it’s a good idea to get assistance from a financial expert or invest in an online financial software package to make sure you tick all the boxes.
Your financial documents tell your investors a story—how you manage money and how you plan to grow your business, which is what is most important to them. Working with an expert to get your books in order will help you gain an insight into your current and future position. - Your Team
One of the first things any business manager does is put together a great team. They are the building blocks of any enterprise. Future investors want to know the value of your team and if you have the right experts to get the job done. Investors also want to ensure that they are backing a team they can trust.
Key employees and senior leadership may be asked to provide background checks and professional references. An investor may also ask former employees and current colleagues about your company’s leadership. To make this process as stress-free as possible, consider providing an organizational chart, proof of your team’s relevant background, and a copy of your employee handbook. - Legal homework
This one is simple. Investors want to know what existing or potential legal issues, if any, might make their investment a risky one. Lack of proper documentation here will raise a red flag. Prepare a folder of all contractual arrangements relating to leases, loans, terms of service agreements, insurance policies, trademarks, intellectual property, or patents. Having everything ready and in one place will also show potential investors that you have done your homework. - Your Customers
Companies that build and maintain strong relationships with their customers understand the secret to long-term success. This is why investors want to know about a company’s customer base, and will ask about long term customer retention.
An investor might want to look at a list of your company’s best customers, including sales contributions and length of the customer relationship. Make sure that you have this information on hand.
While one venture capital group’s due diligence checklist might differ from another’s, having your company’s paperwork and documentation ready to go can ensure a successful and stress-free process, and might just tip the scales in your favour.
Fortunately, smart finance software packages put all the information you need right at your fingertips, and a team of cloud accounting experts can bring it all together for you. Reach out to OCFO to learn more and to make sure that you ace your due diligence.
