October 14, 2022
Most investors will carry out a degree of due diligence before they commit to investing in your business. This blog explains what due diligence is and how you can prepare.
Due diligence is a process during which potential investors find out information about your company to decide whether they wish to proceed with an investment. It usually involves investors asking you a series of questions about different aspects of your business, typically in the form of a questionnaire. The level and scope of due diligence will depend on the type of investor, the nature of your business and the structure of the proposed investment but broadly, due diligence can be broken down into the following areas:
The burden is on an investor to find out everything they want to know about a business before investing in it. There is no duty on the company or its owners to voluntarily offer up information, although in our view it is always better to be transparent.
There is always a risk for investors that a business will not be successful and they lose their money. This is particularly the case in an equity investment scenario where an investor purchases shares in the hope that they will receive some income and eventually make a profit when the company is sold or listed on a stock exchange. If the company fails and is wound up, the shareholders will be the last category of people to receive any money back. By asking for information about the company upfront, an investor will be able to weigh up any risks and make an informed decision about the terms of their investment.
If investors are showing interest, you do not want to lose momentum, so being prepared for due diligence is key. Here are some tips:
Any storage that you use should be sufficiently secure to preserve confidentiality. You could use a file hosting site such as Onedrive or Dropbox. Alternatively, you could look into using a more sophisticated platform such as an online data room.
We would always recommend ensuring that you have a confidentiality agreement in place with potential investors (also known as a non-disclosure agreement or NDA) before you share any confidential information with them. This can be a standalone document or it is sometimes contained in Heads of Terms. Either way, you must ensure that confidentiality provisions are drafted correctly so that they are legally binding and the parties are clear on what information is restricted.