How to sail through the due diligence process

While receiving a term sheet is an important milestone in any company’s quest to raise capital,  the hard work doesn’t end there. Successfully navigating the due diligence process that follows is crucial to determining whether you’ll receive the capital you’re looking for, so it’s important to get it right.

Due diligence is the process investors use to assess the risks associated with investing in your business, while ensuring that your pitch is realistic. Unfortunately, if you make a mistake during the diligence process, the results could be dire. At a minimum, you’ll have wasted precious time and resources, while distracting your senior management team. Far worse, your business might be in jeopardy of getting a lower valuation than you expected or not receiving funding at all. You could even take a hit to your reputation, which might scare off other investors. 

To avoid those scenarios, and sail through due diligence with ease, we recommend following these steps:

Be prepared

Preparation is key. Investors aren’t just looking for charismatic CEOs who can sell their vision, they need a partner who is well-organized, across everything in the business, and ready to go. If you’re not able to provide clear answers to some of the most fundamental questions investors might pose, then you won’t inspire confidence and could be at risk of losing out.

The exact questions you’ll be asked will differ from investor to investor, but you should have well thought-out responses to questions such as how you see the business growing, what the end goal is, and how the capital you’re trying to raise fits in with that. CEOs and founders also need to be able to outline what key risks are associated with that end goal and what contingencies they have in place in case things don’t go to plan, while demonstrating they have a solid exit strategy.

It’s important that you present a clear and concise description of your business and financing plans, and that includes how you’ll put the capital you’re seeking to work. Investors will also require a variety of formal documents — financial statements, revenue and product information, key corporate information, and legal and compliance materials — so make sure you’re organized.

Avoid surprises

Your first meeting with potential investors is where you pitch your vision — what your business is trying to achieve and how you see that happening with the financing you’re looking for. Through due diligence, investors will examine whether what you’ve outlined matches the realities of your business and can unfold as you suggest.

What they don’t want to see is discrepancies, undisclosed issues or hurdles, or a general mismatch between the vision you’re trying to sell them and the reality of partnering with you. Anything short of transparency will raise red flags and could be a deal-breaker. Be honest from the outset and don’t let them uncover any surprises.

To that end, make sure to scrub your numbers and ensure that they match with the figures in your financial statements. And always be straightforward about any potential issues, whether financial or otherwise. If, for example, you have a gap in your leadership team, or you’re poised to lose a big client, then be upfront about it. Investors appreciate honesty and a proactive approach, rather than feeling that their potential partner is dishonest or has something to hide. When it comes to raising capital, no one likes surprises, especially those investing capital into a business.

Manage the process with the right resources

Successfully completing the due diligence process is a lot of work, so lining up the right team to support you makes all the difference. A good team should include C-suite members and key department leaders, existing investors, board members and advisors, legal counsel, and accountants. Everyone involved needs to present a unified and consistent narrative so brief them on the specific messages you need them to articulate, and what has already been communicated to investors.

Proactively manage all the members of the team so that everyone knows exactly what’s expected of them. Keep in mind that diligence can be a significant distraction from the day-to-day management of your business. As such, you may want to consider bringing in external resources to help, such as advisors, auditors, lawyers, or third-party industry experts.

How to proceed with confidence

Due diligence is a critical process, both for CEOs seeking capital and investors considering investment. Being well-prepared, transparent, and not catching investors off-guard with any surprises should put you on track to succeed.

At the same time, it’s important to ensure that you’re aware of the potential pitfalls that can derail deals and to work to mitigate them before you start looking for investors. By adopting the approach set out here, you can dramatically increase your chances of nailing diligence and closing a favorable deal.

To learn more about how to successfully navigate the the due diligence process, and how to avoid the common pitfalls that often trip companies up, check out our new white paper, “Show me the money: A guide to acing due diligence.”