What to expect from a due diligence process
One of the most critical parts of preparing for due diligence – either as a buyer or a seller – is to understand the process. Knowing what to expect leads to a successful transaction.
Two key tips and definitions
It’s not personal
Investors are trusted with other people’s money – generally that of other investors. They are responsible for being wise stewards of that capital, so they must learn about all facets of your business. This is their business, so do not take their questions and/or concerns personally.
Expect a 3-6-month process
Led by the investor, a team of lawyers, accountants, and subject matter experts will look into five major parts of your company: business, accounting, legal, IT, and environmental.
Breaking down due diligence categories
Business due diligence
Investors aim to understand the sustainability of your company’s revenue and cash flow – and the prospects of growing your business. Expect questions about products, pricing, supplier relationships, operations, accounting, HR, IT systems, etc. Investors will likely hire researchers to investigate the broader industry. They may also request calls or meetings with your top customers to gain their perspectives on your business.
Accounting due diligence
This is one of the most critical parts of diligence and may seem to take a while. The review is confirmatory – making sure that what you told the investors is backed up by your record-keeping. Accountants will help the investors to understand your accounting policies, GAAP compliance, and any necessary modifications. Expect your CFO/Controller/CPA to be very involved.
Legal due diligence
Investors aim to understand the sustainability of your company’s revenue and cash flow – and the prospects of growing your business. Expect questions about products, pricing, supplier relationships, operations, accounting, HR, IT systems, etc. Investors will likely hire researchers to investigate the broader industry. They may also request calls or meetings with your top customers to gain their perspectives on your business.
IT due diligence
Third party consultants will likely help the investor to understand the importance of technology to your business, the position of your IT networks, historical spend, future budget expectations, and any infrastructure risks that could be harmful to the business.
Environmental due diligence
Consultants will review publicly available information, conduct on-site inspections, and review prior claims or issues to understand any environmental liabilities or potential for future liability.