There’s a clear difference between firms that are well-prepared and open during due diligence preparation and those that are reactive and guarded. A company’s readiness can significantly impact how smoothly the due diligence process unfolds.
Preparing for due diligence is like convincing kids to do their homework—they know they should, but it often feels tedious without a genuine sense of urgency or interest. Most firms, regardless of their size or stage, tend to focus on revenue-generating activities instead. This focus makes sense; a strong revenue profile initially attracts investors. However, neglecting due diligence preparation can turn into a costly oversight.
On the other hand, watching a management team fumble and react on the spot during due diligence can be stressful for everyone involved. When teams are unprepared, the process becomes chaotic, and the risks pile up.
It’s clear which type of team any investor or partner would prefer to engage with.
What sets the best-prepared teams apart during due diligence?
- Consistent and organised documentation: These teams don’t treat documentation as an afterthought. Instead, they maintain a steady rhythm of updating records—much like flossing daily. This approach makes it easy to back up their decisions and demonstrate a clear historical trail during due diligence preparation.
- Comprehensive overviews in the data room: Providing clear summaries and narratives for each folder in the data room can significantly impact the process. This is an opportunity for management to explain the context, highlight the wins and losses, and show their openness. It’s rare to see, but when done right, it facilitates smoother due diligence for all parties involved.
- Awareness of ‘known, known’ issues: The best teams have an honest understanding of their business’s strengths and weaknesses. They may not have a formal risk register, but they can quickly and clearly communicate the realities of their current operations—the good, the bad, and the ugly.
In contrast, teams that struggle during due diligence preparation often:
- Have minimal to no documentation, making it hard to validate their claims.
- Provide inconsistent and vague narratives about their business operations and technology.
- Discover critical issues during the due diligence process itself. A frequent problem is identifying single points of failure—a risk that should have been identified and managed well before due diligence begins.
My advice? Don’t wait until the last minute to start your due diligence preparation—whether it’s an exit or a major investment round. Begin early and treat it as an ongoing process.
Having a clear and actionable exit plan or diligence strategy will not only help attract investors but also make the due diligence process much smoother and more efficient.
Try our handy exit-guide for your due diligence preparation.
