Few boards of directors will ever subject their business to the level of scrutiny that will be applied by a prospective investor or acquirer. Due diligence can be a long and laborious process, but there are ways to make the process easier.

Preparation

Due diligence is simply all the information an investor believes they need to review and get comfortable with to understand the value and prospects of a business before they invest.

Phrases such as “investor readiness” and “exit readiness” are now well understood, which has led to even very early stage companies organising themselves in a way that allows details of their corporate records, assets and trading to be made readily available to an interested party (under appropriate confidentiality arrangements of course). In many instances, such preparation pays great dividends

If you are a company seeking investment, you can get a head-start by commencing your own internal due diligence well before you need investment. Doing this may help you attract and secure that investment in future. You could, for example, build your system architecture around a Due Diligence Questionnaire. This will help maintain accurate, current and indexed records, not only for the purposes of providing it to a potential investor but also simply as good housekeeping.

Indeed, there may be value in maintaining an in-house Due Diligence Questionnaire. You could then kickstart the investment process by presenting it – together with the supporting information – to an investor. Not only might this accelerate things, it will create a professional impression that will give comfort to your investors and allow you to control the starting point of the process.

A formal process begins with a detailed Due Diligence Questionnaire. This is a set of fairly standard questions, which a company responds to with supporting evidence. Further questions may be asked to obtain a deeper insight into a point or seek clarification to help an investor “get comfortable” with the condition of the company.

If you have not experienced the process before, it is a good idea to familiarize yourself with an example or two. It will be time well spent! You can request a sample questionnaire that we use at MBM Commercial.

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Due Diligence

Getting Comfortable

While some trade buyers or angel investors may be able to form a relatively quick commercial view on problematic issues that are disclosed, other kinds of buyer or investor may feel duty-bound to exhaustively assess every aspect of the business. As deal sizes increase, so do the risks and the resources that are applied in assessing those risks.

Owners and managers are likely to have formed a subjective view of the overall risks associated with the business, based on their experience, historical knowledge, market awareness and personal relationships.

A diligence exercise is designed to identify any and all risks and initially, investors and buyers may only be able to form an objective view, based on a worst-case scenario. Even if their concerns are not overwhelming, an investor or buyer may seek to use such a viewpoint to their best commercial advantage. If their concerns cannot be quickly allayed, the consequences for a business and its owners can be a delay, price reduction or ultimately a failure to conclude a deal.

You can see why pre-preparation pays great dividends but even the best record-keeping in the world may not be able to allay the concerns of an objective third party or their expert professional advisers, who are being paid to be paranoid.

For that reason, as part of the preparations for any large fundraising or exit, the owners and managers may need to engage a new mode of thinking, so that they can identify and neutralise the transaction risks that might cost them time or money when it comes to the closing stages.

There is, of course, no exhaustive list of what might be relevant or what might be claimed to be relevant. Perhaps it is some vexatious litigation in a foreign jurisdiction, the expensive but non-urgent building repair that has been put off for years, the software engineer that failed to sign his contract but created real value or the disgruntled shareholder who has made allegations that never merited a response.

Whatever the subjective view of the directors when it comes to such issues, any proactive steps that can be taken to identify and neutralise them will increase the chances of a successful outcome for the sellers.

Team Effort

Due diligence is a team effort – between the company, investors and their advisers. It is a chance for you to show potential investors what it is like to work with you. We are regularly asked for our guidance on preparing for investment and the earlier any issues can be tackled, the more likely an optimal outcome can be achieved.

Due Diligence

Susan Donald

Senior Business Development Director susan.donald@mbmcommercial.co.uk

Due Diligence

If you need assistance to get investor-ready or you’ve issues that merit further discussion, please don’t hesitate to get in touch with me or one of the corporate team at MBM Commercial.