Before you open the doors for due diligence: Is your financial house in order?
Are you a founder looking to raise capital? If so, before you open the door to potential investors, your financial house might need a little spring cleaning.
As a growth equity investor, we meet with many founders who have a solid handle on the day-to-day operations of their business and have some of the basic financial “pillars” in place. They have a basic accounting system, know how to construct a budget and have policies and procedures for accounts receivable and accounts payable.
This is a great start, but investors usually bring a different level of scrutiny to your operations and financials, and they have a much higher expectation for what “good” or “great” looks like.
It’s the difference between inviting a friend over for dinner and preparing for an open house. With a friend, you might tidy up and shove a few things in the closet. If you have buyers coming to look around, they’re going to open that closet.
It pays to be ready.
What investors want to know
During due diligence, every investor is looking for an accurate view of your business performance, value and potential. They build that picture through a series of data and information requests to try and answer these important questions:
Cap tables are one of the most important documents your company should maintain. If you don’t have one, create one now.
- How is your historical business performance?
- How are you thinking about and planning for growth?
- What is the ownership breakdown?
- Who are your key clients and what is the nature of the work you are completing for them?
- How are you managing the business? What is your attrition, utilization, bill rates, etc.?
- Are there any outstanding risks?
The details of every diligence process look different, but you can count on one thing: Having a plan is key. It takes effort and hours to gather, verify and package all this information for external review, so it helps to know what data and documents will be needed well before you enter the process. Otherwise, it can be a real distraction to the business.
Let’s take a closer look at each of the six standard information requests, and what investors are really looking for when they deep-dive into your data.
Annual and monthly financial statements
Financial statements provide an overall view of the health of the business, and a high-level year-by-year and month-by-month snapshot of growth.