A Startup’s Guide to Due Diligence

For startup founders, balancing daily operations with securing investment is a demanding task. While the due diligence process may seem daunting, it provides an invaluable opportunity to assess the company’s financial health, scalability and operational readiness.

Here’s a phase-wise guide to help one prepare effectively.

Business Audit:

Investors approach due diligence with a keen interest in evaluating not only the financials but also the organisational infrastructure and the potential for future growth. During the business audit phase, they will assess the structure of the company, the efficiency of the processes and the readiness of the team to scale.

Key preparations:

A comprehensive organisational chart outlining key roles and responsibilities
Clear and accessible contact information for key team members
A comprehensive list of current technologies, software, and infrastructure
Employee handbook and any relevant operational documentation

Technical Audit:

In the technical audit phase, investors analyse the product’s market readiness and long-term potential. This involves calculating the Total Addressable Market (TAM) and evaluating market trends, growth projections and the competitive landscape. Demonstrating a robust product-market fit and a clear growth strategy is essential for securing investment.

Key preparations:

TAM calculation and a well-structured sales forecast
Detailed competitor analysis, including market positioning and product differentiation
Customer segmentation and cost of customer acquisition (CAC) data

Financial Audit:

The financial audit is arguably the most critical phase of due diligence. Investors will inspect the company’s financial statements, such as balance sheets, income statements and cash flow projections. Transparent reporting on revenue sources, operating expenses and liabilities is essential to provide a clear picture of the financial health and future prospects.

Key preparations:

Comprehensive and precise income statements, balance sheets and cash flow statements.
Sales forecasts and long-term financial projections
A detailed breakdown of operating expenses, capital expenditures, and any outstanding liabilities

Legal Audit:

Legal due diligence ensures that the company adheres to all applicable laws and regulations. Investors will examine the corporate structure, shareholder agreements, intellectual property and any pending or ongoing legal matters. Properly organised legal documentation will facilitate a smooth due diligence process and minimise risk.

Key preparations:

Corporate records, including articles of incorporation and shareholder agreements
Intellectual property records, including patents, trademarks and copyrights
Supplier agreements, employee contracts and any legal or compliance-related documents

Now, how can one thoroughly be prepared for the due diligence process?

Maintaining comprehensive documentation:

Ensure that all financial, operational and legal documents are easily accessible and accurately updated. Investors rely on this documentation to assess the overall health of one’s company and its potential for growth.

Planning for time and resource allocation:

Due diligence is a detailed and time-intensive process that demands careful attention. Assign dedicated resources within the team to manage the process, ensure timely responses to investor requests and keep the review process on track.

Fostering transparency:

Investors value transparency, so it is important to be upfront about any challenges or risks the business may face. Addressing concerns early on can build trust and demonstrate one’s willingness to work together for the company’s long-term success.

By adequately preparing for due diligence, one can not only streamline the investment process but also demonstrate that their startup is a well-managed, scalable business ready for growth and long-term success.

At GDA, we specialise in guiding startups through the due diligence process, ensuring you’re well-prepared for investment. With our expertise, you can streamline the process and present your business confidently.