Investment offer - what next?

July 01

When you pitch or network your business, you never know when an investor will appear with an offer. The next step will be Due Diligence.

Spark Up advisor Charles Oddy explains what Due Dilgience is and why it is important for entrepreneurs. 

Definition 1: The objective of due diligence is to prevent any avoidable unpleasant surprises. Due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

All investors will want to do due diligence on your business before they invest. Depending on the investor, this can be quick or tedious. At the same time, it is your opportunity to do your own due diligence on the investor.

When an offer is made, by now, an investor has seen your pitches, met some of your team, and read your business plan/website. But much of that information was staged for performance and high impact. So at this due diligence stage, an entrepreneur can expect more detailed questions to verify the information they have been told. The investor will also request certain documents such as Certificate of Incorporation, any legal agreements such as employment contracts, IP, purchaser or supplier agreements, lease agreements, shareholder options etc.

Rule 1: Get a Non-Disclosure-Agreement Signed before providing any confidential or proprietary information.

Rule 2: Be transparent. Once an NDA is signed, full disclosure should be the theme for BOTH parties. If documents aren’t forthcoming, red flags hovering in the subconscious, suddenly become real. It’s the same with any investment.

Rule 3: Get your ducks in a row. Be sure that the entire team are on the same page regarding past, present and future. Answers need to be consistent. A smart investor will bail out after finding anything that is untrue.

So what are the kind of questions that you can expect?

My due diligence takes the form of three main categories: strategy, infrastructure and risk management. Strategy due diligence will drill into the numbers that have been used to produce the financials, price sensitivity, competitor info and market analytics etc. Infrastructure due diligence will focus on the team, licenses, assets and strategic partners. Risk management focuses on liquidity, threats, legal risks and/or existing litigation.

Assuming an investor proceeds with an investment, the relationship will likely last several years before an exit opportunity arises. It is worth assessing each other extremely well to make sure it is a solid, honest, open relationship from the start.

Charles Oddy is an alternative investment and risk management professional with 20 years’ experience within asset management, derivatives and early stage investments. In addition to capital markets, he has maintained a passion for entrepreneurial environments. This entrepreneurial spirit has led him to be involved in angel investing, business mentoring and micro granting for start-ups.




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