DUE DILI

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WHAT IS DUE DILIGENCE?

Investopedia

1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

WHAT DOES THAT MEAN?

The 70-30 Rule*

70%: Intuition (aka: gut). Can they do it? Will they do it?

30%: Facts (aka: prove it): What have you done? How do you know?

*Subjective in all cases and different in a sale

WHEN IS IT APPLICABLE?

Examples and Personal Experience

Investment

Loan Guarantee

Grants

Licensing Agreement

Strategic Partnership/Founding Members

Merger

Acquisition/Sale

HOW IT WORKS

What They May Be Thinking

Private Investor: Can this venture make me money? Can this guy do it?

Angel Investor: Interesting concept. I like this CEO. Can I make money?

Committee: Do they have enough to go before our investor group?

Consultant (scrubs deals): Why should I believe you? Who are you?

Partner: Will they deliver? Can we work together? Can we get more sales?

Founder: Are they trustworthy? Who is leading?

Buyer: Is this going to propel my business forward? Is this added value?

Entrepreneur: Is it enough? Can I make the business case?

ANGEL INVESTMENT EXAMPLE

Sub-Committee

15 min pitch5-10 min q/a

Who you know/Champion.

ContactCoherent, clear, well-

written exec summary or business

planWho you know/ED.

Membership15 min pitch5-10 min q/a

Who you know/Champion.

DUE DILIGENCE

Team

AssignmentReports

Board Membership

Term SheetRisk AssessmentMembership Vote

NO MATTER WHAT

As an entrepreneur, your fiduciary responsibility is to maximize wealth for your shareholders. In good faith, you must be on your game and be prepared.

Have confidence (not arrogance).

DOCUMENTATION

Version Control:

Governance: formation papers, operating agreement/by-laws, cap table, board notes, lawsuits (current or pending)

Intellectual Property: applications, process documents, awards (trademarks, copyrights, patents)

Sales: customer list, pipeline, projections/actual, demos/presentations, client testimonials

Investment package: business plan, financials, PPM, deck, qualified investor

DOCUMENTATION

Version Control:

Accounting: tax documents, licenses, payments, A/R, A/P, debt, insurance

Human Resources: employee guides, org chart, compensation, bios, hiring/attrition

Operations: suppliers, partners, implementation/fulfillment, service

Product Development: new product pipeline, market need, risk/contingency

DON’T GET IN A BOONDOOGLE!

Don’t waste their time or yours

Do it - Document it

Gives you confidence about the business

Storage

Due diligence e-room: access to various levels of information.

Notebooks: Some like paper.

WHAT DOES THAT MEAN?

The 70-30 Rule*

Leadership. Can they do it? Will they do it?

Facts. What have you done? How do you know?

*Subjective in all cases and different in a sale

Thanks!