You have spent considerable time developing your business plan, contacting potential business investors, conducting management presentations, and presenting your business plan to potential business investors. Now you finally have a serious investor who wants to perform “due diligence” before investing real money in your business.
Great! What is “due diligence?”
Due diligence is a thorough examination of facts, references, books, records, etc. available available. of your business and business plan.
And what exactly should you expect during due diligence?
Commercial investors want to be sure that there are no skeletons in the closet and that their company is not Madison Priest’s next “black box technology,” a revolutionary technology that claimed to allow ordinary phone lines to transmit data to the homes of women. people at speeds faster than fiber. optics. By conducting impressive demonstrations, Priest convinced private investors and seasoned companies, such as Blockbuster and Intel, to invest money in his company. In the end, Priest’s ‘magic box’ was nothing more than a high-tech hoax.
In addition to a detailed analysis of your financial statements, business investors will focus on four key areas: finance, management, manufacturing, and marketing. Specific concerns in each area are as follows:
Cash. Cash is king. It is the lifeblood of all businesses, whether they are startups or ongoing. Business investors know it. They will spend the time understanding your cash flow assumptions and, if you are an existing business, they will analyze your cash management practices. Poor cash management or unstable cash flow projections are immediate red flags.
Cost effectiveness. Expect investors to compare your actual or projected gross margins from year to year. This provides a quick indicator of historical or projected manufacturing efficiencies and the pricing environment. You can also highlight potential control issues, excessive overhead, or pricing strategies to capture market share.
Banking problems. Out of compliance financial ratios, bank scrutiny, or suspicious personal or business banking relationships are red flags for commercial investors about how you manage your financial affairs.
Outdated finances. Lack of monthly financial statements or detailed cash flow projections or, for an ongoing business, statements that are not prepared on time are all indications of lax operation or lack of planning.
Continuous crisis. Commercial investors watch closely for signs of weakness in you or your management team. Constant interruptions from emergency phone calls and demands for immediate decisions are signs of disorganization and lack of management.
Substantial changes in key personnel. Unusual turnover in key managerial positions can be seen as a lack of leadership.
No change in top management for many years. An established company with little or no change in the management team may indicate a stagnant business, not up-to-date on new methods or processes, or a very autocratic management style.
Lack of pride or enthusiasm. Seasoned business investors can feel the true pace and spirit of an operation and its management team. Ask them how they do it and they will tell you that it is a sixth sense or intuition. However, it is something they seek and hope to see and feel.
Obsolete methods and processes. Its manufacturing and service methods and processes provide a quick indication of its ability to compete in the markets it serves and change gears if business doesn’t go as planned. Even if you are a new company, business investors will want to know the methods and processes you plan to use to make your product or provide the services you plan to offer.
Denies. If you’re already in production, investors expect you to know your reject rates, the issues that cause them, and the quality controls you have in place. How you handle rejections is an important issue for business investors. Remember, scraps aren’t just limited to production scraps. They also include missed service calls, late deliveries, and other process failures.
Just in time (JIT). Inventory is often the first place entrepreneurs and entrepreneurs run into trouble. Too much and you can run out of cash quickly; very little and you will quickly start to lose deliveries and customers. How well you manage inventory and understand it is a key strength commercial investors look for in the management team.
Sales per employee. The overall productivity measure is a good simple benchmark investors can use to gauge their historical or projected performance against other companies in their industry. Questions like: What do you plan to do differently from your competitors to allow you to use the number of employees you use or plan to use? Why do you think you can earn more or less per employee than your industry average?
Market share. Be prepared to compare your expected market share or changes in it with your competitors. Remember to only measure the relevant markets that you serve. Also, avoid justifying your market share by taking small percentages from extremely large markets. “Our projections only assume that we get 1% of this billion dollar market” is one of the most insignificant statements that an entrepreneur or business owner can make.
Fairs. Investors will be interested in the activity and interest generated by your company’s booth at trade shows compared to your competition. Some may even want to attend and observe the next trade show you attend. Be sure to take photos, videos, and conduct customer surveys to demonstrate and support the interest and activity around your booth.
New products. What is the percentage of new products or services that generate future sales? How often will you need to introduce new products or services to maintain your market position? What is your success rate with new products and services?
Business investors are constantly trying to spot symptoms of trouble. It is important that you never mislead or mislead them. Most investors have extensive business experience and regularly see or have seen many different companies and industries. The questions they ask often come from their experiences in the real world. That is why it is important not to get defensive with your questions.
Be prepared when potential investors want to support your business plan. Use this list to conduct your own review of your business. Then, like many successful business owners and entrepreneurs, take the time to leverage the insight and questioning that commercial investors have to offer to improve your business and prepare for future investor meetings.