It is exciting for a company to finally get to the due diligence phase of a deal since so many deals fall apart well before that ever happens. Of course, it is also incredibly overwhelming because there is so much to consider and put together, and in many cases, there is only a brief window of time during which a lot has to happen. Most companies probably don’t give the due diligence process much thought until it is actually on the horizon, but this could end up destroying the deal.
To streamline the due diligence process, companies should basically begin planning for it as soon as their businesses are up and running. Even companies that bootstrap may need external funding eventually, and preparing for the possibility, however remote, is a smart move. So, in an effort to ensure that your company has a seamless due diligence investigation, here are some questions you may want to ponder:
When should planning start?
We kind of already answered this one above, but we realize it may not be practical for a small startup to spend too much time or resources planning for something that may not occur until years in the future. Nonetheless, company leaders need to begin discussing if and when they anticipate future fundraising rounds. Depending on when that might actually happen, this will dictate when it makes sense to really start preparing.
Regardless of the actual timeline of events, it is always best to start as early as possible. This allows for ample time to collect the relevant data, analyze it, organize it, and make any necessary corrections before submitting everything for external review.
What will investors want to see?
Once the team has decided that it wants to start scraping together the plethora of information, there will probably need to be a discussion as to what all that should include. The type and amount of information that venture capital firms will want to see will definitely vary by sector, and it will also depend on the amount of money that is being requested. Nevertheless, there are certain umbrella topics that can help a company figure out what to hold onto or find. It may be helpful to divvy up these topics so that each leader handles one segment.
For example, any document relating to the company’s finances will obviously be required, and this will include budgets, balance sheets, financing documents, securities instruments, and anything else that affects the company’s bottom line. Of course, another category will relate to legal items, such as pending litigation matters, contracts, and employment records. Ultimately, the team must come up with broad categories of information and then ensure that all documents relating to that are organized under the appropriate heading, keeping in mind that some documents may need to be filed under more than one heading. For more help on figuring out what to include, check out our due diligence checklist.
How should information be presented?
This may seem like something that does not need to be decided until closer to game time, but there is no sense in collecting all of this information and then haphazardly saving it across hard drives. As soon as the decision has been made to identify and collect relevant data for an impending or future due diligence investigation, a virtual deal room should be established. Then, as documents are located and/or created, they can be immediately uploaded to the virtual deal room, dragged into their pertinent folder, and safely stored until actually needed. Ongoing organization efforts will prove invaluable once things really get going, as there will not be time or patience for people to scamper about trying to find a requested item.
What else needs to be considered?
We could probably write a book to answer this question, but we doubt anyone would want to read it. Due diligence is quite an experience, and sometimes even the most painstaking preparation will end up being futile, as unforeseen issues occasionally arise. But, to improve the likelihood that a deal survives due diligence and makes it to the closing table, comprehensive planning, meticulous organization, transparency, and communication are vital.