It's an exciting time. New company, great prospects, money invested, lawyers signed off the paperwork. Money transferred. What now? Start adding value to the company. It's fun meeting people, promoting the product/service. More customers. More income. Break even. Sell the company, lots of money for everyone. That's the picture Business Angels buy into. But is it the reality? What's the impact if you are not focusing on the exit from day zero?
Checking all the contracts and historic financial information is easy to do. It’s all paper work that can be done from the desk. Is it enough to make a decision on whether to invest in a business?
No! Here are some of the other things you should look into:
- Product or Service.What is the value proposition? Is it faster, cheaper or better than the alternatives? Does it do what is claimed? Do potential customers believe it can do what is claimed? What do the potential customers believe are alternatives?
- Customers. What is the profile of customers: many low value, or few high value? If few high value, what is the dependency on staff relationships? Is the market local, regional or global? Is the market consumer, business, seasonable, or dependent on anther event (e.g. The Ashes)? What information is held on customers? How is it managed? How accessible is it? Who has access to it? How are customers helped to buy the product/service? How is support managed? Does every communication with the customer get recorded? What reputation does the company have with customers? e.g. how many would recommend to a friend?
- Suppliers. What is the profile of suppliers: many low value or few high value? Who are the suppliers and what do they supply? How is stock control managed? Are there service level agreements? If so, do they match the service level agreements you have with your customers? Do they have access to your customers? Could they disintermediate you?
- Market knowledge. What market is the company in? Is the market shrinking, stagnant or expanding? What is the price sensitivity? How does the company appear to the outside world? Who are the customers? How are they being reached? What are the plans to increase the number and quality of customers? How much communication is there with the market place: customers, lost customers, journalists, analysts, opinion leaders/formers, etc.
- Competitors. What are the competitors doing? How do their products compare? What is their financial position? What is their image in the market place?
- Staff. What responsibility and authority is vested in each staff member? How close are staff ties to key customers or suppliers? How are all the staff motivated? What are their abilities and strengths? Do they work well as a team? What are the friction points? How are they being resolved? How are they managed?
- Exception handling. What happens when things go wrong? How are warranty returns managed? How are software failures managed? Whose liability is it? Do staff have responsibility and authority to solve problems? If so, what are their limits? Is there a written process to follow?
- IT Support Systems. Does the system support the customer through the buying cycle: interest, first purchase, support and subsequent purchases? Can it manage text, email, voice, paper records, notes, etc? Who controls the IT system? Where are the records stored? Where are back-ups kept? What happens if a record is deleted (can it be recovered)? What audit options are in place (to verify customer/company conversations)? How easy is it to change the system to suit the company’s needs should any internal process change?
That’s quite a list. Anything missing? If so, please help others by adding your notes below.
Lastly the best people to carry out Due Diligence are those people who have “no skin in the game”. That is people who are disinterested in the outcome of the investment decision but want to provide high quality information to help the Investor make an informed decision. That’s where I come in…
Oh, my last thought: the definition of due diligence that I subscribe to is “Due diligence is a way of preventing unnecessary harm to either party involved in a transaction.”