Thursday, December 6, 2012

Due Diligence Checklist

- Due Diligence Checklist -

What is a Due Diligence? 

A due diligence is a formal process of validating representations made during an investment investigation. There are usually lawyers involved with the purpose for doing background checks on the founders and preform company searches. There are also usually accountants involved to review the financial information that was submitted in the business plan. They check over the historical financial information, the tax filings, and check the accuracy of the projected financial information. On PitchStreet, almost all of the investors preform a due diligence if they are considering to invest in your company.

Every investor has their own formula for preforming a due diligence on your company. Some request all the information at once, in a detailed documentation, while others request information at different times and stages of the check. It does not really matter how the angel investor approaches the due diligence, it is just proven that there there will be a much higher profits returns when one is preformed. There may be many questions and could take up to several weeks to preform. The more prepared you are the better

Here is a due diligence checklist to help you prepare:

General Background
  • History of the company and any predecessor companies.
  • Reason you are in this business
  • Your company’s short- and long-term objectives.
  • The company's financial needs.
  • Your company's advantage
Management and Human Resources
  • Organizational chart.
  • What is the makeup of your Board of Directors?
  • Who are your professional advisors involved?  (lawyer, accountant, consulats, etc.)?
  • Is the management team set and completed? Any gaps?
  • Is there a chance, or any plans, for a change in the management team? Explain
  • Are there any employment agreements? If so, what are they?
  • Is there any confidentially agreements? If so, what are they?
  • What are the DOB, SS# and addresses of main principles on board? (Background check)
  • Company size (employees)
  • Is there an employee handbook? Can I have a copy?
  • What needs are there for the staff? Any current, or anticipated changes?
Products or Services Offered
  • How will customers use your product or service?
  • What benefit(s) will the customers value from your product or service?
  • How does your product or service compare:
    • Price?
    • Quality?
    • Current method?
    • Competitive product?
    • Service?
    • Availability?
    • Engineering?
    • Credit terms?
  • Is there patent, trademark or trade secret protection?
    • If so, who owns it? Is there a license from the owner of the technology?
  • What is the demand? Is it demand basic or created?
  • Is it a mature market?
  • What are the current trends in the industry? What changes have been made in the past years?
  • What is the geographic market?
  • Is there an opportunity for exporting?
  • Where is the growth opportunity? (Roll-up strategy? M&A’s?)
  • How is your market segmented?
Customers (if they exist)
  • Who are your customers, or who will they be?
  • Why are customers buying or why would they buy from your company?
  • Are there any long-term purchase agreements?
  • Is there any trend among customers toward:
    • Integrating the manufacturing of this product into their operations?
    • Purchasing substitute products?
    • Switching suppliers?
  • Who are your major competitors?
  • What is their unique advantage?
  • Are they growing?
  • How do they compare on key buying issues?
  • What are their plans?
  • How will they react?
Sales and Marketing
  • What are your pre-contract sales costs?
  • When is your sale closed?
  • How much custom engineering is required?
  • What are the upgrade obligations? Are they clearly defined?
  • Is your product/service well documented?
  • How much engineering support is required on installation and in operation?
  • Do you have a direct sales force? What is its size? Cost? Effectiveness?
  • Are sales representatives used? How are they selected and compensated?
  • What are your channels of distribution?
  • What advertising and sales promotion practices are used?
  • What is your sales forecast and justification?
  • Who are your target markets?
  • How is your product priced?
  • What are your company’s credit policies?
  • Fixed assets, location and condition.
  • Location and description of facilities.
    • Assessed and fair market value.
  • List of your future facility and equipment needs.
  • Explain your basic manufacturing process?
  • How are procedures being modified to improve efficiency?
  • What system is in place to assure the quality of your product or service?
  • What are your critical raw materials?
  • Who are your critical suppliers, contracts?
  • What factors might cause a substantial delay in production?
  • Status of inventory, including level and obsolescence.
  • Do you have any contractual obligations other than those requested here?
Financial Considerations
  • Audited financial statements
  • Capitalization Table
  • Do you have any grants? Do you have any grant opportunities?
  • Sales backlog information.
  • Aging reports – both A/R and A/P (most recent).
  • Company’s tax I.D. #.
  • What are your projected financials, including cash flow?
  • What are your sources and uses of funds?
  • Do you have a strong cost accounting system in place?
  • Is your insurance coverage adequate?
  • What is your tax liability and payment record?
  • What is your worst-case scenario?
Legal Matters
  • Articles of Incorporation.
  • Bylaws and Amendments.
  • Minutes of Directors’ and Shareholders’ meetings.
  • Certificate of Good Standing from the State of Michigan.
  • Subsidiary listing.
  • Contractual agreements.
  • Stock Option Plan.
  • Do you have any current or anticipated litigation (State or federal agency)?
  • Regulatory hurdles (e.g., FDA, animal use, clinical studies, GMP, ISO)
  • Environmental regulation/violations (waste discharge, RCRA, OSHA, EPA)?
  • Warranty and service guarantees.
  • Do you have any product liability?
If you go over this checklist, and make sure you have all the information, this will help make your due diligence go much smoothly and up your chances to get funded.


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