One of the best pieces of business advice is simple: you must always be prepared for due diligence. You never know when a buyer will make an offer, or when you’ll need to raise capital for a new expenditure. Here are 10 strategies for ensuring you’re always prepared.
- Begin early. Don’t wait until you need an investor or are planning for retirement to get your affairs ready for due diligence. Maintaining a tidy financial house should be your goal from the very beginning. Maintain an orderly system for fathering and organizing all important data, and then send it all to your accountant and lawyer on a regular basis.
- Use English. Many businesses now have home bases abroad. Even if you live in a nation where English is not the dominant spoken language, keep your documents in English. If you don’t, you may have to spend an inordinate amount of time playing translator.
- Pay attention to the details. Make sure all of your contracts are signed and dated, that all contractors have assigned the intellectual property rights of their creations to you, and that your business formation documents are consistent. You don’t want to chase someone down years or decades down the road. Make sure everything is as it should be today.
- Be mindful of NDAs. You’ll probably sign dozens of NDAs in the process of running your business. Sometimes these documents prohibit you from disclosing their existence. Ensure your NDAs contain exclusions for due diligence.
- Sign an NDA. Someone else’s word is not a reliable reassurance that your sensitive data will be protected. Don’t rely on friendship or blind trust. Have everyone involved in due diligence sign an NDA, even if doing so feels unnecessary.
- Build a virtual data room. Your internal filing system helps you keep your documents together for daily operations, but you’ll have to upgrade to something better when it’s time for due diligence. Advanced programs should allow you to track document views, index paperwork, and assign specific permissions to different users.
- Lean on a team of trusted advisors. You can’t do it all yourself. You need to hire and work with a team of lawyers, accountants, and other experts who know the process of due diligence inside and out. Level the playing field with the other side by building a team of experts.
- Perform a self-audit. Sell-side due diligence allows you to uncover and correct problems before they have the potential to affect a sale. Ask your team to ruthlessly comb through your finances and alert you to any and all issues they uncover.
- Manage liabilities. You might not want to think about people who want to sue you or any areas of legal exposure. However, addressing them at the outset reduces the chances that they later come back to haunt you. Be honest about unresolved areas of exposure. If possible, address them before you get to due diligence. Settling a lawsuit now is often better than fighting about it later.
- Walk your investor through the information. You need to facilitate due diligence. Help the investor or buyer understand what they are seeing. This allows you to set the tone of due diligence and promptly address any missing data. It also facilitates trust that improves your credibility and may improve the end value of your company.
