Due diligence is an investigation or audit of a potential investment, which serves to confirm all material facts. Due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Venture Capital organisations, who are investing other people’s money, always carry out formal due diligence, however Business Angels investing their own funds often skip many aspects of reasonable care that should be taken with the investment.
Every Investor carries out a form of “due diligence” automatically by the questions he asks of potential investment opportunities, however when investing into a business it is sensible to do this in a more organised and professional way.
Due diligence can be separated into basic components:
- Background checks on the management team involved
- Legal checks on the status of the company
- Accounting checks on the finances presented
- Factual checks on the statistics or figures given
- Relationship checks (both internally and with customers)
- Company’s systems
This is in addition of course to the normal questions and your judgement on the attractiveness of the business. If you are entering into due diligence you should already believe from what you have found out so far that the business is sound, it’s market growing, products/services good and so on. Due diligence is to confirm this and make sure that there are no nasty surprises.
- Identity – passport, driving license, utility bill
- County court judgements (on individuals and company)
- Criminal record and director disqualification
- Credit rating
- CV references, past employment check, stated qualifications check
- Companies House records, board meeting minutes, shareholding
- Ownership of Intellectual Property
- Mortgage deeds, titles, leases
- Tax and accounts up to date
- Insurance cover
- Legal cases or threats of action
- Bank statements, cash flow
- Stock, work in hand
- Past year’s accounts and understand changes
- Liabilities, debts, loans
- Have accounts inspected by accountant for accuracy and any unusual occupancies
- Sales and costs forecasts – justify assumptions
Relationships & Personnel
- Staffing levels, temporary or permanent staff, contracts of employment
- Key personnel – staying, happy with sale/investment/your involvement
- HR records up to date and accurate
- Key customers – reference, no issues outstanding, loss of customers pending
- Check these are modern, efficient, integrated, non-existent or needing up dating
- If joining business with another existing business will the systems be compatible
- Accounting systems in use (IT)
- Customer Relationship Management systems
- Manufacturing and stock systems
- HR systems
There are companies that will carry out these checks for you, which will save time since they will be experienced in gathering this information.
You may feel that having a third party do the due diligence eases your own relationship with the business, however you still need to make sure you understand and are happy with the results.