An investor or lender will want to check you or your business are suitable for funding before agreeing to give you money.
This is called 'due diligence'.
If your business is well prepared for due diligence, it will help you raise funding.
There are 4 main types of due diligence:
The kind of due diligence used will be different for each business. It will also depend on the investor or lender.
There's usually some overlap between the different types of due diligence.
1. Financial due diligence
Financial due diligence will normally look at your business's:
- historical performance
- financial planning (financial projections)
- reporting and procedures
An investor or lender will check your profit/loss and balance sheet for the last 3 years (or for how long you've been trading if it's less than that).
Financial planning (financial projections)
Any investor or lender will check your plans for the next 3 years. This includes your:
- cash flow
- balance sheet
They will check your plans make sense. This means you should explain:
- how your business will respond to changes in your plan, for example if you sell more or less
- any assumptions you've made
For example, if you've made the assumption your turnover will grow, will it grow because of market growth or price rises?
Find more information on planning your finances.
An investor or lender will check if your business:
- has paid the right amount of tax to date
- is using tax schemes they're satisfied with
Reporting and procedures
An investor or lender will want to know about your business's reporting and procedures. This could include:
- profit/loss accounts
- cash flow statements
- accounting procedures
- business processes, like how you make sure invoices are paid
2. Operational due diligence
Operational due diligence checks how you run your business.
This includes your:
- systems and technology
For example, an investor or lender will be interested in the reliability of any equipment you use.
They might also be interested in any procedures you have in place to protect your business.
For example, if you use computer systems you should have a policy to keep your business safe online.
Operational due diligence will also look at your employees.
This includes looking at how they are contracted. For example, whether your employees have permanent contracts and their terms and conditions.
It might also look in more detail at the background of your senior management team and board (if you have them).
3. Commercial due diligence
Commercial due diligence could check the information you've given about your:
- technology licences
The kind of information an investor or lender checks will be different depending on the nature of your business.
For example, if you sell to other businesses an investor or lender might contact your customers to find out if they're likely to continue buying from you.
If you sell direct to the public, they might research consumer trends – to judge whether the public are likely to continue buying your products.
They could also look into any contracts you have with suppliers or distributors, or licences you own for technology.
4. Legal due diligence
Legal due diligence will affect all other types of due diligence.
Investors and lenders could check things like:
- the rights or regulations of any contracts
- how your business is set up, for example as a sole trader, partnership or limited company
- that you own certain assets, for example equipment
- intellectual property
For example, if you run a partnership an investor or lender will want to see your partnership agreement.
Or, if you have staff, they might want to see details of any employment contracts.
Performing due diligence on investors and lenders
You'll need to perform your own due diligence on an investor or lender before you accept money from them.
This will include checking:
- their reputation
- their ability to fund your business
- their ability to understand and add value to your business
- what other businesses they've invested in and how they've acted
Help and advice
Having a business plan will help you to prepare for due diligence.
If you're looking for advice on due diligence, you should contact a lawyer or an accountant.