Due diligence is a cumbersome albeit integral step for many business transactions. Although it is a lengthy and detailed ordeal, the process really boils down to sharing a ton of documents for others to scrutinize so that they have a solid understanding of what it is they are gaining from the deal. Some document requests may seem odd, but those in charge of the due diligence investigation have to review just about everything imaginable, as there are a lot of different things that have the potential to jeopardize a company. Here are the most vital documents for fundraising due diligence:
One of the easiest ways to understand a business is to examine the documents that were created to establish it. This means reviewing articles of incorporation, an operating agreement, or the partnership agreement, depending on whether it is a corporation, limited liability company, or a partnership. The due diligence team may also request meeting minutes and the corporate bylaws. Because maintaining records is critical to abiding by local, state, and federal laws, especially the IRS code, the due diligence team will want to ensure that everything is in order and up to date. In addition to items within the corporate book, a certificate of good standing will always be necessary.
Evaluating the financial standing of a company is always one of the most important aspects of the due diligence investigation. This is an incredibly broad category of items, as it includes all documentation that shows the company's accounts and activity, as well as paperwork associated with any external funding or dealings. The due diligence team will need to see how the company budgets and manages its money, and they will have to review any loan agreements or other security instruments to see how leveraged the company is.
Due diligence is all about minimizing risk and avoiding costly legal headaches. As a result, companies have to be transparent about any legal issues, whether former, pending, or possible. If lawsuits are active, the complaints and any other associated documentation has to be disclosed. For cases that occurred in the past, it will be important to be honest about the outcome, no matter how damaging. In addition, companies should identify any issues that have the potential to lead to a lawsuit and perhaps offer suggestions on avoiding it. Other necessary information will be documents related to legal and tax compliance matters.
Real and Intellectual Property
Property has always been an important asset, and intellectual property (IP) has become even more so these days. In many cases, providing information about a company's real and intellectual property can help a company's case given how valuable innovative IP can be. But, there may be disputes that could deter interested investors if the appropriate measures were not taken, such as filing for a patent or safekeeping trade secrets. During due diligence, this will be the sort of information that the team will be looking at to determine whether there is more value or potential liability.
Disgruntled employees can create a lot of expensive problems for companies, especially when there are specific contracts, non-disclosure agreements, or non-compete clauses at play. For this reason, the due diligence investigation will also entail a review of the company's employment details. If there is a Human Resources department their records will need to be scrutinized, especially the financial information regarding payment of the appropriate personnel and payroll taxes.