Financial statements are vital to investors. But how do investors use financial statements? Before your meeting, learn what they want to see and why.
February 26, 2022
Due diligence is a process completed by a third party, usually potential buyers or investors, where the interested party does research into your company before moving forward with a transaction. It assures the buyer or investor that your company would be a worthwhile acquisition or a safe investment. As such, the manner in which you handle any hurdles presented during this process can go a long way toward showing your professionalism, preparedness, and capable leadership.
Unfortunately, any fumbles or missteps — such as being unable to find important documents, sending outdated information, or otherwise displaying a lack of preparedness — can reflect poorly on your company. The time to put together the due diligence items in this article is well before any requests for information hit your inbox.
The following due diligence checklist contains information and documents you should always have at the ready — especially if you anticipate receiving due diligence email or paper requests anytime soon.
Before we jump into the long list of documents you will need to find, a quick explanation is in order:
Each type of transaction will require different documents for the due diligence phase. You will encounter different requests for information when you are trying to secure funding, for example, than you will if you’re preparing to sell your business. Because “due diligence” is such a broad term and may vary based on the parties involved, it’s best to maintain a highly organized system to keep track of almost every important document your business generates.
While you will probably never need every single document on this list all at once, it is likely that you will eventually need each of them at some point during various transactions your business will encounter in the future. So, it’s always a good idea to have the following documents finalized and ready to send at a moment’s notice.
Due diligence isn’t just about handing over a stack of paperwork and waiting for a response.
The goal of this guide is to help you prepare thoroughly so you can present your company in the best light possible to whomever might be interested. Ideally, therefore, your preparation shouldn’t end once you’ve gathered all of the above documents. To maximize your chances of everything going smoothly, organize each document into a system that makes sense to you and to any potential buyers or investors.
Keep in mind, some interested parties may want to glance through your documents just to make sure you have them, while others prefer to break out a magnifying glass and examine every detail. Read through each document carefully to check for errors, outdated information, and other problems that might have escaped your attention.
Reading through all these documents will also help you mentally prepare to answer questions on the fly, without needing to pause and refresh your memory. The better you understand your company — from the tiniest details of your lease contracts to the overarching goals planned out in your company’s mission statement — the more confident you’ll be in fielding questions, which makes your company more attractive to buyers and investors.
It may help to put yourself into the buyer’s or investor’s shoes and anticipate what he or she may want to know about your company. What would you want to ask if you were thinking about spending hundreds of thousands or potentially millions of dollars on a startup founded by someone you’ve never met?
Putting yourself into that mindset before you move forward into the due diligence process can help you understand what information your buyer or investor may request — and how important it is to provide accurate answers promptly.
If you think the above due diligence checklist seems intimidating, you’re not alone. Many startup founders struggle to find, prepare, and organize such a vast amount of information.
As long as you’ve done a good job managing important financial documents, your company should have no problem with the due diligence phase of transactions. However, unless you’re a financial expert, it can be tough to know whether you’ve managed your finances well and are adequately prepared for information requests.
The solution is to make sure your finances are managed by professionals such as the ones at Zeni. By handling the in's and out's of your financial statements and transaction records, Zeni helps your startup maintain an audit-ready state, and prepare for due diligence in advance so that you always feel confident going into any type of major transaction.