You’ve nailed the pitch, and now it’s time to focus on what investors will ask for once you’ve caught their initial interest. We have already covered the pre-funding and post-funding checklists. In this post we will try to guide you on how to prepare for a due diligence audit.
Once an investor has expressed interest in investing in a company, the deal will enter into a due diligence process. “Due diligence” is a term given to the investigation or audit of a potential investment. Throughout the due diligence process, investors look to confirm all material facts in regard to investment.
Investing in early stage companies is risky and conducting extensive due diligence can reveal problems with a company’s business early on allowing investors to identify the key risks associated with the investment.This will allow them to either develop a risk mitigation plan with the company or back out of the investment altogether.
Some investors conduct due diligence prior to issuing a term sheet, a nonbinding agreement used to propose the terms of an investment. However,most investors, especially when participating in more competitive deals, will issue a term sheet and then complete due diligence. For those deals, successful due diligence results in the legal paperwork being drafted and the investment round closing.
A due diligence (DD) check list is divided into:
- Financial DD
- Legal DD
Financial Due Diligence
Financial DD covers all aspects of business with a financial perspective covering books of accounts, taxation, A typical Financial DD check list is reproduced below:
| Particulars | DD Requirements |
| Accounting Records, documents and MIS | Access to Accounting package |
| List of books, records, documents, registers maintained | |
| Sample copies of cash and bank vouchers | |
| Bank reconciliation statements | |
| Monthly MIS | |
| Borrowings | Detail of all secured/unsecured loans/working capital debt/ loan from shareholders/ directors & relatives loans |
| Purpose of loan | |
| Sanctioned amount, disbursement date/ schedule | |
| Balance confirmations from lenders | |
| Financials / Returns / Assessment status | Audited Financial statements |
| Internal audit report | |
| Tax audit report | |
| Transfer Pricing report | |
| Copies of notices / inspection / orders from VAT / Service Tax / Income Tax authorities | |
| Status of assessments | |
| Key Contracts / Agreements | Agreements/ contracts with customers and relevant amendments/addendums as application |
| Details of Patents/Trademarks | Nature of intellectual property – codes generated, physical machinery invented, new formulation, etc. |
| Ownership of patents | |
| Research and development strategies | |
| Fixed Assets | Fixed assets register |
| Details of intangible assets | |
| Capitalization Policy – Tangible and Intangible Assets | |
| Debtors | Age-wise analysis of debtors |
| Breakdown of provisions and bad debts | |
| Creditors | Age-wise analysis of creditors |
| Payroll / Renumeration | Consolidated payroll register |
| PF / ESI / PT payment Challans and returns |
Legal Due Diligence
Legal DD covers foreign exchange regulation, company law compliance’s,labor law compliance’s.A typical Legal DD check list is reproduced below:
| Particulars | DD Requirements |
| Shareholder Details | List of all current shareholders including addresses and numbers of shares owned Share Certificates |
| Details of the Directors | Name of all the directors, appointment of directors, resignation of directors |
| Board and General Meeting Minutes | Copies of Board Minutes Copies of Annual General Meeting and Extra Ordinary General Meeting Minutes |
| Private Placement | Offer Issue Letters Record of Offer Letter Filings with the ROC |
| Annual Return filed with the ROC | Forms filed with the ROC |
| Charge created on Assets | Filings with the ROC |
| Incorporation documents | MoA(Memorandum of Association) and AoA (Articles of Association) Certificate of Incorporation |
| Register of Members | Register of members Register of Debentures holders |
| Loans/Investments/ Guarantees and Securities | Register of Contracts Register of Loans Register of Investments |
A sample DD check list can be found here. Founders and the team have to devote time and energy to the DD audit. Typically, a VC team will be using the gathered diligence materials to write a note to enable investment decision.
So if you are raising money and want help with due diligence audits get in touch with our experts at Integra Books.
