Be Prepared When Business Investors Look Beyond Your Business Plan

You have spent considerable time pulling your business plan together, contacting potential business investors, making management presentations and pitching your business plan to prospective business investors. Now you finally have a serious investor who wants to conduct “due diligence” before investing real cash into your business.

Great! What’s “due diligence?

Due diligence is a thorough examination of available facts, references, books, records, etc. of your business and business plan.

And, what exactly should you expect during due diligence?

Skepticism…

Business investors want to be sure there are no skeletons in the closet and that your venture is not the next Madison Priest “black box technology” — a revolutionary technology that claimed to allow ordinary phone lines to transmit data into people’s homes at rates faster than fiber optics. By staging impressive demonstrations, Priest convinced private business investors and seasoned companies, such as Blockbuster and Intel, to invest money in his venture. In the end, Priest’s ‘magic box’ was nothing but a high-tech hoax.

In addition to a detailed analysis of your financial statements, business investors will hone in on four key areas: finance, management, manufacturing, and marketing. Specific concerns in each area are as follows:

Finance

Cash. Cash is king. It’s the lifeblood of all businesses – start-up or on-going businesses. Business investors know this. They will spend the time understanding your cash flow assumptions and, if you’re an existing business, they’ll analyze your cash management practices. Poor cash management or shaky cash flow projections are immediate red flags.

Profitability. Expect investors to compare your actual or projected gross margins from year to year. This provides a quick indicator of your historical or projected manufacturing efficiencies and pricing environment. It can also highlight potential control issues, excessive overhead, or under pricing strategies to capture market share.

Bank problems. Out of compliance financial ratios, scrutiny from banks, or suspect bank relations – personal or business – are all red flags to business investors about how you manage your financial affairs.
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Outdated financials. The lack of monthly financial statements or detailed cash flow projections or, for an on-going business, statements that are not prepared on time are all indications of a loosely run operation or a lack of planning.
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