The best way to approach this question is to think about how you might buy a computer or a new television. Not only do you want to know that the device will power on and perform its basic function, but you consider the list of features and benefits across various models, consider pricing differences; look at warranty options; available peripherals, etc.
In short, you want to make sure that you get exactly what you were expecting for your money.
The same is true of an investor looking at a company. Sure, you may be making money (or have very good prospects in this regard) but how can I (as an investor) be confident that the business will grow successfully? What risks are inherent in the business and how well have management understood and mitigated them?
The process by which investors come to a final decision is known as “due diligence”, which is literally what must be applied before such a level of confidence may be achieved.
Due diligence is typically divided into categories:
1. Financial – detailed P&L and balance sheet; historical performance data; ensuring the current accounts are in order; there are no unaccounted liabilities; debtors and creditors are under control; systems are in place to deal with all management and compliance obligations; sound processes are in place for authorising payments; corporate governance standards, etc.
2. Legal – reviewing all current and relevant past contracts (commercial; employment); intellectual property protection (patents; trademarks); corporate structures (providing clarity and simplicity for incoming investors); shareholder agreements (terms and conditions that may impact incoming investors); supplier and customer agreements; trading terms and condition, etc.
3. Commercial – value proposition; business plans including future development roadmaps, new business initiatives, marketing strategies, sales/profit forecasts, HR structures, resource requirements, SWOT analyses; supplier/customer interviews to establish reputational bona fides and quality of the core value propositions; infrastructure audits; disaster recovery plans, etc.
The above is certainly not exhaustive but it gives you a flavour of the sort of information investors will want to analyse ahead of making a commitment.
If in reading this abridged list you say to yourself: “I might have a few of these items but certainly not all…,” then you may not be investor ready.
In many cases, it is just a matter of documenting and collating much of what you have, but in some cases the missing elements may require some thought and work to generate. As you think through this process just keep asking yourself: “What would I want to know about this business before becoming a partner in it?
You, of all people, should know it warts and all… which is just want the investor would like to understand!
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