Investor Due Diligence

Investor due diligence

Due diligence is a process that verifies and confirms statements and views about a business and its prospects.   Due diligence reduces the risks of an investment.

Every deal has risks attached to it so that you need to understand what risks to accept and which demand more detailed investigation.

Tip: You should undertake due diligence on the company prior to deciding to invest.


A due diligence programme should help to answer the following questions:

•    What is critical to the investment decision?
•    Which sources of value need to be underpinned?
•    Which risks must be mitigated?

Due diligence falls into the following main areas:

Area

Issues

Commercial and operational•    Company's strategy for delivering identified revenue enhancement and/or cost savings
•    Technical merits of product/service offering
•    Strengths of customer and supplier relationships
•    Competitive positioning
•    Market outlook
•    Ability to influence the market
•    Possible synergies
Management•   Assessment of capability – management interviews
•    Identification of gaps and future plan
•    Take up references from previous employers, customers, suppliers and funders
Financial including tax and pensions•   Historic financial performance
•   Current financial position
•   Financial model and projections
•   Tax: all taxes (corporation tax, VAT, employment taxes, rates, stamp duty, import duties, etc.) including deferred tax provided in balance sheet
•    Pensions: adequate provision in balance sheet
•    IT status and future requirements
Environmental•   Environmental risk of a company's site(s)
•   Highlight any non-compliance with environmental regulations or company's own policy
•  Assessment of any ‘contaminated land’
Risk management and insurance• Assessment of any present, future and past exposures
Legal

• Legal compliance with statutory obligations

• Ownership of the company's IP including patents

• Shares properly issued

• Assessment of any shares 'promised' to current or former promoters and/or employees





 

 

 

 



  

 



 

 


 

 

 

 

 

 

Not all of this will be applicable to a start-up or young company but they at least should be considered.

A sample commercial and legal due diligence questionnaire is included in Appendix A of our investor Guide - Investing in Private Companies Insights for Business Angel Investors

Entrepreneur due diligence

Tip: Entrepreneurs can also undertake due diligence on you, checking your record of support or otherwise, so be prepared for this…
This may be a challenge for entrepreneurs since angel investors do not generally have a website or publicly available information.  However, this is a small Island and someone will tell what they know about you…

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