The Due Diligence (DD) supports the Investment Analysis (IA) and is focused on the areas that are crucial to the success of the investment and the business.
Investment Analysis (IA)
The Investment Analysis is likely to include:
Overview of the business
e.g. what the business does, its product or service. Is the product fully developed and market tested? A SWOT analysis of the proposal.
Management Team and Personnel
e.g. the experience of the management team, how are they incentivised and motivated? What strengths & weaknesses are in the current team and how any weaknesses will be addressed? How well is the finance and operations functions managed? Any personnel issues.
Market opportunity
e.g. what is unique or different about the product or service being offered? Why will customers buy it? How will this translate into sales?
Market
How big is the market? UK or International? Who are the actual and potential customers? What about competitors?
Business model
What is the route to market, or means of getting products or services to customers, and how does the company achieve sales? How will manufacture be covered? What plans are there for expansion and future development?
Financials
How has the business performed historically? What are the financial projections for the business from a Profit &Loss, Cash Flow and Balance Sheet perspective? How might these vary with different sales, gross margin or investment scenarios?
Investment Structure
Who are the existing shareholders/investors? Who is in the proposed investment syndicate and what are their backgrounds? What is the proposed investment structure? Any special rights, warrants and options? What will the post investment balance sheet look like?
Post Investment
Are further investments being explored? If so when and for how much? Will other investors be able to follow on?
Exit strategy
What are the motivations for the seller? Why now? Anything we should know.
A data sheet
It is useful to have the address, website, date of incorporation, directors and shareholders details, finance required and purpose, summary of structure etc. all in one place – usually at the front of the document.
Project Plans
Current projects of new products and services developments and improvements, detailing the roll out of initiatives, key milestones and the expectation for revenue generation.
Risk assessment
Identifying key failure points for the business and how this might impact returns to the business.
Due Diligence (DD)
The Due Diligence (DD) is likely to include:
Commercial DD
Testing the commercial assertions put forward and assessing the businesses viability. Examples might be a test of the market’s size and level of competition and of pricing assumptions.
Financial DD
e.g. testing the robustness of projections and accuracy of the modelled financials. Sensitivity to underperformance and robustness of assumptions.
Legal DD
This will normally be carried out by lawyers and should cover appropriate property searches, including physical assets, intellectual property, contracts, freedom to operate, and any trademarks or patents. It should also identify any potential liabilities arising from any on-going legal or regulatory action and any warranties and indemnities that have been given.
Referencing Management & Key Personnel
References from external partners, suppliers and business contacts etc.