Before opening the doors to due diligence: Is your financial house in order?
Are you a founder? looking to raise capital? If so, before you open the door to potential investors, your financial house may need a little spring cleaning.
As a growth equity investor, we meet many founders who have a solid handle on the day-to-day operations of their business and have some of the basic financial “pillars” in place. They have a basic accounting system, they know how to build a budget, and they have policies and procedures for accounts receivable and accounts payable.
This is a great start, but investors generally bring a different level of scrutiny to their trades and finances, and have a much higher expectation of what “good” or “excellent” looks like.
It’s the difference between having a friend over for dinner and preparing for an open house. With a friend, you could tidy up and store a few things in the closet. If you have buyers coming to look around, they’re going to open that closet.
It pays to be ready.
What investors want to know
During due diligence, all investors seek an accurate view of the performance, value and potential of your business. They build that picture through a series of requests for data and information to try to answer these important questions:
Capitalization tables are one of the most important documents that your company must maintain. If you don’t have one, create one now.
- How is the historical performance of your business?
- How do you think and plan for growth?
- What is the breakdown of the property?
- Who are your key customers and what is the nature of the work you are doing for them?
- How are you managing the business? What is their wear, utilization, billing rates, etc.?
- Are there pending risks?
The details of each due diligence process look different, but you can count on one thing: having a plan is key. It takes effort and hours to collect, verify, and package all this information for external review, so it helps to know what data and documents will be needed well in advance of entering the process. Otherwise, it can be a real distraction for the business.
Let’s take a closer look at each of the six standard information requests and what investors are really looking for when they dig into your data.
Annual and monthly financial statements
Financial statements provide an overview of the health of the business and a snapshot of high-level growth year-by-year and month-by-month.