Many businesses are now looking for investment to help them grow at an accelerated rate. A key pre-requisite before and funding is released is to conduct a Due Diligence exercise to ensure a good return on investment.
The Due Diligence exercise typically involves a combination of specialists who will look into every nook and cranny of your business and will conclude in a report to highlight key risks, provide mitigation plans and to re-assure the banks that their investment is in safe hands!
It can be pretty daunting for the management team to find both their functions and themselves under intense levels of scrutiny for an extended period of time. If your business is about to go through a Due Diligence exercise we provide the following guidelines to help you through the process.
It is very worthwhile to expend some upfront effort in preparing your management team for an impending Due Diligence exercise to both reduce the impact on your day to day operations and ensure a successful outcome. The following represents a checklist to help your prepare:
- Know the plan: Make sure the Business Plan and all related documents are current, synchronized, and in the hands of your senior management team. If everyone gives a different story, you have no story.
- Management: Ask everyone to review and update their role specs and CV’s as you may need to prime the investor if there are any anomalies
- Team: Ensure you have agreed which personnel will be involved and that you have assessed the likely impact on their day jobs. There is nothing more frustrating for an investor than finding that a key resource is difficult to pin down!
- Communicate: Brief the team fully on what is happening, and why. Present the financials and answer any questions that come up.
- Key vendors and customers: Contact them to explain what is happening and confirm that they are happy to contacted. Use this as an opportunity to review their satisfaction levels.
2. Due Diligence
Due Diligence exercises typically take around 4-6 weeks to complete and both your team and the assigned consultants will be under pressure to conclude the exercise to schedule. The areas that are typically covered during this exercise are as follows:
- Organisation: Moving from a self-managing organization where the directors may enjoy a good degree of autonomy to one where they need to answer to a board that includes representation from their investors is a big change and not everyone will be comfortable. A key checkpoint for any investor is verify that the senior management team have the necessary expertise and are fully committed.
- Product & Services: This will cover the products and services the company delivers along with the fit to customer requirements and longer term plans. It is not uncommon for customers to be interviewed to take on board their feedback.
- Market: There needs to be evidence that there is both an existing and future demand for the types products and services that the company delivers and that the company can effectively position itself to address this market. Alongside this an investor may also look at trends in the market including economic, political, and demographic conditions.
- Sales: This will involve a review of the company’s sales model, advertising, and pricing strategy. It is also likely to involve a competitive assessment, barriers to entry, price sensitivity and the addressable market opportunity.
- Finance: This is likely to be a particularly demanding analysis of the company cost base, revenue and forecasts along with a risk analysis of any existing contractual obligations (e.g. penalty and termination clauses in existing contracts). It’s also likely that the level of financial rigor will increase to meet the requirements of any investment made.
- Legal: Companies can have complex legal structures, especially if they have acquired other businesses and the legal review will both review the existing structure and may propose required changes as part of the investment. It is important to fully assess any commitments that must be met along with any that represent a potential risk to the business. This review typically is conducted alongside the financial review.
3. Year 1
If the company successfully passes its Due Diligence stage the investment arrangements are finalized along with the updated board structure. Our advice is that the next twelve months are probably the most critical period to drive the changes needed to make the transaction a success.
We strongly recommend the need for a company transition and transformation plan to provide a focal point for directing, tracking, reporting and communicating the changes that need to be made across this period.
It is important to bear in mind that once an investment is made it establishes a long-term relationship between the company and the investors that may be difficult, if not impossible, to break. The objective is to make this a mutually beneficial relationship.