Before you open the doors to due diligence: Is your financial house in order?
Are you a founder? looking for capital? If so, your financial home may need a little spring cleaning before opening the door to potential investors.
As an investor in growth stocks, we meet many founders who have a solid grasp of their company’s day-to-day operations and have some of the financial foundation “pillars” in place. They have a basic accounting system, know how to prepare a budget, and have policies and procedures for debtors and creditors.
This is a good start, but investors tend to look at your operations and financials on a different level, and they have much higher expectations of what “good” or “great” looks like.
It’s the difference between inviting a friend to dinner and preparing for an open house. With a friend, you might do some tidying up and put a few things in the closet. If you’ve got buyers coming to see it, they’re going to open that closet.
Being ready pays off.
What investors want to know
During due diligence, every investor is looking for an accurate picture of your business performance, value and potential. They build that picture through a series of data and information requests to try to answer these key questions:
Accounting charts are one of the most important documents your business should keep. If you don’t already have one, create one now.
- How is your historical business performance?
- How do you think about and plan for growth?
- What is the property division?
- Who are your most important customers and what is the nature of the work you perform for them?
- How do you run the business? What is your churn, usage, billing rates, etc.?
- Are there any outstanding risks?
The details of each due diligence process look different, but you can count on one thing: having a plan is key. It takes effort and hours to collect, verify and package all this information for external review, so it helps to know what data and documents are needed well before you go into the process. Otherwise, it can be a real distraction for the business.
Let’s take a closer look at each of the six standard inquiries and what investors are really looking for when they dive deep into your data.
Annual and monthly overviews
Financial statements provide an overall picture of the company’s health and a high-level view of year-to-year and month-to-month growth.