Key elements of the due diligence process

Investment transactions often fail during the due diligence process because the investors discover negative activity or business practices. At this point, investors are meeting and interviewing all of the main employees, following up with advisers and early customers, and visiting the business location. Maryland entrepreneurs who are looking for investment deals might improve their prospects by understanding the key elements of this process.

During team member interviews, startup investors look for evidence that they are working toward the same goals, have respect and have various skills. Investors could change their minds when there are discrepancies in the details that they previously received. The same is true when they find non-disclosed negative publicity, regulatory issues or tax problems, so full disclosure is a must.

Entrepreneurs need to disclose all financial risks such as credit denials, contingencies, large contracts and recent bankruptcies as well as have detailed information setting forth all debtors, investors and owners by percentage. When they set goals for their team, these need to be met or exceeded consistently. Investors view no goals and many missed goals as red flags and indications of future results.

Testing the entrepreneurs’ relationships with customers against the data that they provided is another part of the process. Not taking an interest or interacting with customers is considered negative activity. Many investors also spend a day with the marketing and engineering team to assess internal process and the product and to discuss intellectual property plans and status. They generally ask an external expert to verify the entrepreneurs’ analysis of competitive positioning as well, so entrepreneurs need to avoid surprises by prepping the investor team on their direction and strategies.

Generally, the best way for a start-up company to attract needed capital is to be as transparent and open as possible. New entrepreneurs may want to have an experienced attorney help them in this regard.

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