Posted on March 5, 2013 @ 08:14:00 AM by Paul Meagher
When an investor does due diligence on your company it is important that you have a good idea, that there is a market for your product or service, that there are no undisclosed financial or personal liabilities that could derail your company, and that you appear to be a person of high integrity with a good knowledge of the industry. The due diligence process does not happen overnight because it takes awhile to assess these factors which involves considerable communication, exchange of documents, and attempts to hammer out a term sheet that defines the basis for a agreement to provide capital.
The due diligence process not only deals with the idea, the market, the financials, disclosure of potential liabilities, and personal assessments;
it also deals with the people, processes, and controls you have in place, or will put in place, to ensure that growth will occur as planned.
If you receive an influx of capital in order to expand there is a good chance that the money will not achieve the desired objectives if you do not have the proper people, processes, and controls in place so it is important that you be able to demonstrate to an investor your capabilities in this regard.
Source: Isocert Solutions
The people aspect has to do with who is working in the company, their role, their educational background, their experience in the industry, and their ability to handle issues that will arise as you scale you business.
The processes are the recipes or checklists that people use on how to do the key things in your business. If you are an existing business and your processes are still not running smoothly, there is a good chance that the influx of capital will not help the situation. So make sure you have processes that are running relatively smoothly and you know how they will be affected when scaled up before you seek capital to expand.
Finally, there is the issue of controls which comes down to what tools you have to monitor how your business is doing and to deal with issues that arise in light of the feedback your monitoring tools provide. Your ability to monitor your financial status, your sales levels, the quality of your product or service are some of the controls you should be able to address as part of the due diligence process.
There is no escaping the fact that businesses operate in a chaotic environment with many elements that are hard to predict. That does not lessen the need for people, processes, and controls to help tame that chaos. Adding more capital to a chaotic system with inadequate people, processes, and controls is not likely help matters; in fact, it may make things worse. A critical part of determining whether you are ready for growth capital is determining whether you have the proper people, processes, and controls in place to handle existing growth and the growth that is expected to occur when more capital is injected into your business.