Be prepared to hand over anything an investor requests.
Due diligence is the company background investigation that a private equity investor undertakes before investing in a business. It begins when the the investor issues a term sheet, which is a non-binding investment proposal. The process assesses whether the management team is a good fit for the investor, there is a real profit opportunity in the target market, the company has the necessary infrastructure to carry out its marketing plan, and all financial and legal documents demonstrate a viable business.
Instructions
1. Contact all persons mentioned in your business plan and let them know you are seeking venture capital backing and that they might be contacted for interviews during due diligence. This includes the management team, board of directors, board of advisers and employees. Answer any questions they might have and make sure you are all in agreement with regard to your understanding of their roles within the organization. Investors will look for discrepancies.
2. Hire a certified public accountant (CPA.) and submit to her all of your company's financial documents for scrutiny. Leave nothing out, as your CPA can explain what documents might be missing. Prepare those documents and prepare to hand them over to an investor upon request.
3. Hire a lawyer immediately upon receiving a term sheet from the investor. Have the lawyer scrutinize the term sheet and give you a run-down of its positives and negatives for you as the founder. This will help you to make an informed decision about whether to accept an investor's initial terms. Give your lawyer copies of everything you gave your CPA as well as all legal documents pertaining to you or your business. He should be able to tell you anything that will raise red flags with investors and correct those items. Ideally the lawyer should be familiar with the venture capital industry.
