Investors Due Diligence
Once you have found an Investor for your venture you will go through what is known as the due diligence process. In a nut shell due diligence is the process by which the Investor, or appointed legal representative of the Investor will verify everything that has been detailed in the business plan.
As an entrepreneur you have nothing to fear about the due diligence process. It may sound daunting but if you have been accurate and truthful in your business plan you have nothing to worry about.
It will be very beneficial for you to prepare for this process by anticipating any concerns that may be raised. To help you in preparations Edge Venture have compiled a brief and by no means exhaustive rundown of the due diligence process.
Review of the organisation structure
This element of the due diligence process is primarily focused on established companies but relates to start up companies also. The Investor would like to check everything that has been mentioned regarding your company. Areas like management structure, shareholders, assets, joint ventures, affiliations and strategic alliances. This area of due diligence also covers the skills and experience of the key personnel involved with the venture.
Legal Considerations
The Investor will need to determine the legal standing of your company or any legal implications of the new venture. This will include any pending or previous litigation claims. For start up companies the Investor may well look in to the previous legal record of the Entrepreneur and/or Directors of the company. This may not be limited to civil litigation proceedings but also any criminal convictions, especially those relating to fraud.
Property
The Investor will look into “real property” mentioned in the business plan. This may include deeds, property leases, financing leases and equipment leases.
Intellectual Property
Intellectual Property related matters will also need to be verified if they have outlined in the business plan. Patents, patent applications, copyright and trademarks will all be clarified as well as any patent licenses and copyright licenses granted to the venture. If licensed software is used in any processes or implementation of the business these will be reviewed as part of the due diligence process.
Debt
Any current credit arrangements, lease financing, loans or outstanding overdrafts relating to the business will be investigated. The investor will also need to clarify if any business asset related guarantees are made part of any credit agreements.
Agreements
The investor will need to have access and be able to review any agreements that the company has with suppliers, customers, agencies, web developers etc. Insurance related agreements will also be looked into including professional indemnity, third-part liability and property damage.
Brand and marketing collateral
The investor will probably like to view the current brand, corporate identity, advertising and other marketing and sales literature. It is also good to back this up with a report from the design agency explaining how the corporate identity and brand identifies with the target market.
Financial matters
Not surprisingly a key area of the due diligence process relates to financial matters. The investor will want to clarify the businesses current financial standing and future strategic plan. If any reports or studies have been carried out by third-party consultants, the Investor will most likely want to see how theses reports validate the projections in the submitted business plan. For established business the investor will examine current accounts and previous years audited accounts.
It really does pay to be prepared for any issues that may be raised during the due diligence process. If there are any grey areas it is better to be open about them with the investor than have them doubt your credibility by finding them during the due diligence process.
There may be cases where certain factors are beyond your knowledge and the Investor will take that in to account when confirming the offer of Investment.
Edge Venture Commitment
All Edge Venture premium members have access to our entrepreneur mentoring service. You are given a priority email address that you can send any investment related questions to. A member of the Edge Venture team will try their very best to find the answer on your behalf.
