*Please note that this series of articles provides a general guide to navigating a typical capital raise process. While this is based on our experience in previous capital raise matters, it will not be relevant in all circumstances and should not be treated as legal advice.

Due diligence is a crucial stage of the capital raising journey, as it will likely determine whether or not a potential investor will decide to back your business. Accordingly, the due diligence process is extensive and arduous, and something that you will need to be prepared for.

What is due diligence?

In the capital raise context, due diligence typically refers to the process whereby prospective investors analyse your business to determine its strengths, weaknesses, risks and potential for growth. In short, investors use this period to learn as much as possible about your business to elucidate their investment decision.

Although due diligence is mainly for the benefit of the potential investor, you will need to be heavily involved in this process to answer key questions, allay concerns, and ultimately try to convince investors that the opportunity to possibly share in the growth of your business outweighs the risks of such investment.

Why is due diligence important?

Without knowledge of the financial status and operation of your business, an investor will not want to risk their capital. Being prepared for the due diligence process will go some way to convincing an investor that you are serious about growing your business, even if it means being honest about its shortcomings.

How can I prepare for the due diligence process?

The best way to prepare is to anticipate what a potential investor will want to know about your business, and gather information about these areas. For example, this may include information concerning:

The structure of your business - does a single entity own your business or are the assets of the business split between multiple entities?
Shareholding – how many shareholders does your business have and what proportion of ownership do they each hold?
Financial statements – does your business have a profitable record? If not, is revenue predicted to grow in the future?
Documentation – are all your key documents in place? This includes contracts with key suppliers and clients, employment agreements, and intellectual property registrations in the company’s name.

What pitfalls should I watch out for?

You should have a strong team in place prior to the commencement of the due diligence process. Your accountant and lawyer will be vital in preparing due diligence documents, while your lawyer will be the party who primarily answers the investor’s questions. In this respect, choosing a lawyer with experience in the capital raising sphere can prove crucial.

It is also wise to be proactive in the due diligence process. For this reason, many businesses seeking to raise funds will prepare a prospectus or information memorandum containing key details of the business. This not only saves time in the due diligence process, but may also impress potential investors.

Can I conduct my own due diligence?

Absolutely! Even if an investor is willing to inject cash into your business, you need to consider whether that investor (or the deal they are proposing) is right for you. At all stages you should ask yourself: can I see this person or these people being long-term partners in my business? If the investor is not someone with whom you can see yourself working, then you may wish to look elsewhere for funds.

How we can help

Merton Lawyers has a strong track record of assisting businesses through the due diligence period. Please get in touch to book a complimentary meeting and discuss how we can assist you.

Author, Darcy Keogh.

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