Due Diligence Checklist for Your Startup

Information Investors May Request as Part of their Due Diligence Checklist for Your Startup

Startup due diligence is one of the most important components of the funding process for any new business.

The process enables and investor make a more informed decision concerning the investment potential and related level of interest since the process covers the entire life of the startup

This also enables an investor to obtain an in-depth understanding of the company, business model, culture and ultimately investing in the company.

What is a due diligence checklist?

A due diligence checklist is an organized, comprehensive method Angel Investors and VC firms use to fully analyze and understand the inner workings of a business. As part of the due diligence process, investors will request access to important information about the business they want to invest in, such as its inventory, financial numbers, assets, contracts, intellectual property, and outstanding legal issues, if any.

In the recent past we had a workshop on investor readiness, hosted by O&M Law and here are the key areas highlighted as part of the due diligence checklist that most investors would be looking at:

Legal Compliance

From General Legal Compliance to sector-based legal compliance, legal due diligence gives investors a better opportunity to understand the target company and its operations before getting involved.

Investors also want to know any pending or potential litigation, discussions with regulatory and other government agencies and licenses, permits and consents.

Legal due diligence process also helps identify the possible problems that can act as impediments to closing the deal. When both parties know the possible impediments, they can take steps to address the same to ensure the smooth completion of the agreement.

Tips

Ensure that you have the following documents in place:

• Copy of Memorandum and Articles of Association
• All material contracts, including any joint venture or partnership agreements; limited liability company or operating agreements
• Licensing or franchise agreements

Financials

Financial Due Diligence usually covers three to five years and the focus is on: Earnings, Cashflows, Net Assets and forecasts which would include the underlying assumptions and historical trends of your businesses.

Tips:

• Always invest in a good finance team and systems and keep proper and up to date accounting records
• Also plan to have up to date proper audits from your first year of operation or as soon as possible.
• Decide on the financial reporting standards to apply based on your long-term strategy keep up with changes in the accounting standards affecting your industry
• Align structure with the long-term strategy and avoid complicated structures

Taxes

Taxation due diligence usually covers five years and it covers the applicable taxes and status of a Company’s Itax Ledger

The purpose of risk and opportunity reviews is to evaluate existing exposures and identify possible errors, inefficiencies or potential risk areas

The scope can include all taxes or certain types of taxes.

Tips:

• Identify any inherent tax exposure areas on back taxes
• Identify tax planning opportunities
• Mitigate identified risks
• Consider having quarterly or annual tax health checks and implement the recommendations of the tax health report

The list could go on and on and would mostly depend on factors such as size location and nature of business.  Other key areas that Investors would also look into could include employees and benefits, licenses and permits, Intellectual property that includes all documents related to Patents and know-how, Trademarks, Copyrights, and Logos.

The only way to address the due diligence needs of investors is to accomplish them over time as you negotiate through your startup journey. Those entrepreneurs not recognizing the need for this due diligence decrease their chances of obtaining funding from Angel and VC investors.

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