Business Entrepreneur: Finding the money and due diligence

finding the money and due diligence

Over the last few years, I have written several articles specifically focussed on supporting the business entrepreneur.  In an engagement with a potential client, I asked him if he had his documents in order as he was seeking to raise funding for a rather interesting project that I thought had lots of potential.  He responded by saying that he had all his corporate and business registrations in place.  It was clear that we were talking at cross-purposes.

So, I rephrased the question and asked him the following question:

“If I was an investor looking to invest in your company and/or your project and appointed an advisor to do a due diligence on your company and/or your project, would you pass the due diligence test? If you fail to pass the due diligence test I would certainly not invest. ”.

It was clear to me that the entrepreneur did not understand the rules that money follows whether it by way of share capital or business loans and that due diligence is the foundation for these rules.

No investor, at least a competent investor, will and/or should invest without performing due diligence on your company and/or project before investing or borrowing money.  Failure to do so merely constitutes a different form of gambling.  A due diligence is a formal risk mitigation tool used to verify the fundamentals of your company and/or project to determine in general terms whether your company and/or project will deliver what you have promised to the investor or funder.  Broadly speaking, due diligences encompass three basic elements namely: technical, financial and legal.  This is achieved by the provision of answers to three basic questions:

  • Can what you said be done?
  • Can you afford to do what you have said, and will it generate a return?
  • How will you do what you have said?

The entrepreneur needs to understand that the above three questions broken down systematically usually end up with due diligence questionnaires that could be longer than twenty pages depending on the size of the company, size of the project and/or size of the investment or finance required.

As an entrepreneur, if you are looking for funding whether, by way of an equity injection or business finance, an important step that adds significant credibility to your company and/or project is to ensure that you will pass any due diligence performed by a potential funder or investor.  A due diligence is not a business plan or having the necessary corporate registrations or business permits and approvals, but these will no doubt form an integral part of the due diligence exercise.

It may also be that as an entrepreneur, you may wish to sell your business or acquire another business.  In these instances, having a due diligence done and analysing the results may affect the purchase price you are asking or the price you are prepared to pay.  Let me provide you with a few examples:

  • In analysing the business’ cash flow projections, what financial assumptions have been used to determine the escalation of operating costs, labour costs, leasing costs and growth in sales?
  • Does the business or factory, use tried and tested technology in the production process? Is it readily available, repairable and/or replaceable?
  • Are there fair and reasonable agreements in place with shareholders, landlords, employees, funders, lenders, technology/material suppliers, customers and agents that address all of the business and commercial risks?

We at BBP Law look forward to assisting entrepreneurs in conducting and preparing for due diligence.  You may be surprised at the results but will certainly be rewarded with value that will assist in your decision making processes.

For further information, please do not hesitate to contact us.

 

Barrisford Petersen
barrisford@bbplaw.attorney
Managing Director

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