What are the things to remember when preparing for due diligence?
Due diligence is one of the most pivotal parts of launching, operating, growing, and exiting a startup.
Being able to pass due diligence will make or break your startup’s potential and vision, and all of the work you put into it.
It is also one of the areas in which startup founders have the least experience and knowledge.
Being able to ace this part of the journey can help unlock immense value throughout all of your ventures.
You already know that failing to prepare is a sure-fire way to fail.
So, here’s what you need to prepare for due diligence, and what you need to remember as you approach and go through it.
The Ultimate Guide To Pitch Decks
When You Have To Pass Due Diligence
There are two main moments when you’ll have to ace the due diligence process as a startup and its founder.
The first is during fundraising.
To get from a pitch and term sheet to capital in the bank to fuel your venture at each stage you’ll need to pass through investors’ due diligence.
It can be a stressful, time-consuming process.
Then there is the due diligence when it comes time to exit your startup.
Whether you are going through an IPO, SPAC deal, merger, or acquisition, there will be due diligence.
For most of this article, we will be specifically honing in on due diligence in the M&A scenario.
There may also be some similar due diligence when obtaining regulatory approvals, licenses, major contracts, obtaining loans, etc.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
What Is Due Diligence?
Put simply, due diligence is the process of a third party investigating and verifying the details of your company.
Often you personally and your key team members as well.
They need to ensure that everything that you have told them in your pitch and presentations is true.
As well as discovering information, evaluating potential risks, and values that you may not have discussed yet.
This is typically a very detailed process, and far more intensive than you can imagine until you’ve been through it.
This isn’t just for the investor or acquirer’s own benefit and curiosity.
They will typically have their own investors, bosses, or partners to which they are legally and financially responsible.
If they drop the ball on conducting thorough due diligence, and there are issues or losses, they may be legally and financially liable for that.
So, as uncomfortable and annoying as it may be, they are often just doing their jobs.
The easier you can make it for them to breeze through the process and check the boxes, the easier it will be for you too.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
The Costs Of Failing To Be Fully Prepared For Due Diligence
The costs of going into due diligence poorly prepared can be very expensive. It might even cost you everything.
For this reason, you must note these things to remember when preparing for due diligence.
At a minimum, there is a good chance you will blow the deal. It just won’t make the cut.
Whether you finally get the deal closed or not, there are many other ways that lack of preparation can cost you.
Time is a huge one. Firstly, it is time for the deal. You could waste months or years, with as much as 50% of your time down the drain.
That is going to cost you in your lead in the market, growth, and much more.
Time is money, and every extra hour this takes can cost a lot. Even more so if you have to start over from scratch again.
Or you have to repay your friends and family from your own pocket because the whole venture becomes a bust.
Even if you get it closed, a shoddy due diligence process can mean you are constantly having to renegotiate inferior terms and pricing.
Being tied up in due diligence means you are burning labor hours, other capital, and if it doesn’t work out, your connections too.
Relationships & Opportunities
Closing a big fundraising round or exit can make leveraging a lot of relationships and winning hard-earned opportunities.
Did you blow it because of your own lack of preparation or lack of listening to advice?
Then don’t anticipate those people to stretch and sacrifice their time, reputation, and resources again.
While the startup ecosystem and M&A space has grown immensely over the past decade, it is still relatively small and well connected.
It’s a lot about people, introductions, and reputation. Word gets around fast.
Then there is the lost funding, potential, lost time getting to goals, helping customers and impact, and business value.
What To Expect From The M&A Due Diligence Process
Expect those performing due diligence on you and your company to dig into every possible factor, fact, datapoint, and more.
Expect them to want to dig into every dollar that has passed through your company, and every digit in your financials.
Expect them to want to review every piece of paper and document and invoice that has and will pass through your company.
Anticipate them wanting to speak to all of your team members, each of your customers, previous investors, vendors and suppliers, employers, and business partners, and more.
Expect teams of people to be working on investigating everything about your company.
This may take as little as a few weeks, to usually months, or even a couple of years.
At each revelation, there may be things to fix and clarify, or your buyer will want to renegotiate the price and terms.
An important part of preparing for your acquirers’ due diligence is knowing how to value your company. When you’re ready for more information on how to get that done, check out this video I have created. You’re sure to find it helpful.
Things To Remember When Prepping For Due Diligence
There are many things to remember when preparing for due diligence.
Which is only compounded with everything else that you are juggling at the same time.
The following will help you prepare and be mentally ready for this stage of your startup’s life.
Get An M&A Due Diligence Checklist
There is so much involved in preparing and getting through this, that unless it’s on a list it won’t get done.
Use a template or existing checklist, get one from your M&A advisor, have one custom-made from your term sheet or LOI.
And have it in a collaborative, shared file that you can work on with your team from anywhere.
Put Your Deal Team Together
This is a vast and intense process that will involve all of your departments and can be a full-time job for a whole team for a while.
Nominate those in your company that will run and manage the process.
Be sure that you have M&A experts on call to help you through this process. Make sure they are on the same page, and on retainer as needed.
This can include consultants, legal, and more.
Clear Your Schedule Of Everything Else
This process alone can take up at least 50% of your day. It will likely involve middle-of-the-night and weekend calls and meetings too.
You can’t afford to slack here. Or blow it because you are not focused.
It will go far better if you can clear your schedule of everything else to focus on this. Get it done. Do it well and fast.
Don’t Run Out Of Money
The labor hours for you and your team alone can cost a lot. Then there may be bankers, extra accounting and legal work, and more.
Then there is all of the document prep and organization. You need a budget for this.
At the same time, you need to be investing in your business growth and traction, and profitability.
If you run out of runway and capital, then at best your acquirer is going to use it against you to try and pick up your company for pennies on the dollar.
Be sure you are paying your bills, your team, and have enough capital in the bank to make it through the worst-case time frame.
These are only some of the things to remember when preparing for due diligence.
Settle Any Pending Lawsuits & Litigation Threats Or Complaints
This is a huge area of risk for investors and acquirers.
They don’t want to put money in, and then be on the hook for a lot more, or to have bought a bankrupt company with a bad image.
If there is anything like this coming your way, squash it as quickly, quietly, and efficiently as possible.
Some M&A deals are going to require regulatory approvals.
That may be due to size, jurisdiction, politics, monopoly, and antitrust laws.
Or licensing when there is a substantial change in ownership. Be sure this is on your radar and taken care of quickly.
Load Your Virtual Data Room
Your data room is where you will share all of the data your investors or acquirers require.
Most of this information should be anticipated well in advance. You should know what this is before you start pitching.
Go ahead and get it loaded, well organized, and ready to be viewed.
You want a solution that will allow you to grant, monitor, and revoke access.
You may need a secondary data room so that you can share more sensitive data as you progress through the deal.
Note this tip down as one of the things to remember when preparing for due diligence.
Clean Up Your Accounting
There can be huge issues with startup accounting. Since this is a financial deal, this is one of the most important factors to get right.
You may need to employ a better accounting firm or have a third-party financial audit.
Don’t leave red flags and a mess that will cause friction and slow things down.
Be Prepared To Respond & Fix Things Quickly
It is likely that there will be many flaws found in your paperwork in this process.
Everything from NDAs to contracts with vendors and suppliers and employee contracts may need to be shored up.
Be ready to act fast and just get it done.
You may also get frequent requests from investors and acquirers for clarification or more details and updates.
No matter how inconvenient and frustrating they are, respond positively and quickly.
No other approach is going to help move things forward, remove friction or get them to help you.
Don’t Forget Your Business
You can put on a great pitch and presentation, with all of the right numbers.
However, if everything starts slipping after you start talking about a deal, then you’ll lose that deal faster than it took to put it on paper.
This is the time to be sure your business is firing on all cylinders too.
You’ve got to have that growth and improvements in the most important metrics to your buyer.
There may not be time for you to juggle all of this.
You may need to make more hires, bring in more experienced executives, or even a new outside CEO.
If the deal falls apart, you’ll be in an even better position to keep going than before.
Get Your Team On Board
Be sure your staff, cofounders, shareholders, board, and more are all on board with this deal and are on the same page.
You’ll need the votes to match the paperwork requirements. You’ll need them to be cohesive as they engage with buyers and investors.
There are going to be a lot of things to remember when preparing for due diligence.
No matter what the scenario; fundraising or selling your business, these factors will help you get ready, and keep the right mindset throughout the process.
Failing to do so will certainly prove to be extremely expensive.
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