GET DUE DILIGENCE READY FOR AN INVESTMENT ROUND/ EXIT

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If you’re planning an investment round or exit, you need to be due diligence ready.

At the very least, this will help the deal move quickly, which can be crucial if your cash runway is short. However, if something unexpected comes up that affects value, it could be used to renegotiate the deal value down or even cause a buyer or investor to withdraw.

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WHAT IS DUE DILIGENCE?

Your investors or buyers (or rather their lawyers, accountants, tech specialists, etc.) will assess the value of your business and identify any potential risks or liabilities that might impact their investment or acquisition.

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WHAT IS LEGAL DUE DILIGENCE?

Legal due diligence is a comprehensive review of your company’s legal affairs, covering everything from corporate governance to regulatory compliance and contractual obligations.

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HOW IS IT DONE?

Lawyers (often using legal tech) will go through a detailed list of questions and documents to assess your company’s operations and legal standing in each country in which you do business. This typically includes:

• Customer contracts: Revenue (MRR/ARR), renewal terms, IP protection, data obligations, limits on liability, enforceability, change of control issues, etc.
• Corporate governance: Cap table, Companies House filings, shareholder agreement(s), articles of incorporation, board and shareholder resolutions, minutes, etc.
• Financing: Loans, debt financing, finance leases, factoring arrangements, etc.
• Supplier contracts: Agreements related to your tech stack, tech development, IP licenses and assignments, marketing and PR services, logistics, office/property leases, and other suppliers.
• Asset ownership: Ownership of tech and other equipment, property, etc.
• People: Employment and freelancer contracts, policies, handbooks, incentive/bonus/share option schemes, etc.
• Disputes: Pending or threatened litigation, settlements, regulatory investigations.
• Regulatory filings and compliance: Registrations, licenses, etc. – including data protection and GDPR compliance.

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HOW DO YOU GET READY?

To streamline the due diligence process and mitigate potential issues:

1. Organise Documentation

• Create a central repository of relevant documents and contracts.
• Maintain it in well-organised folders with a logical naming convention and an up-to-date index.
• Log who has access to what and when.
• This will ensure easy access and retrieval during due diligence inquiries, expedite the review process, and promote transparency.
• Use tech platforms like Dropbox, Google Drive, or SharePoint if needed, or consider dedicated due diligence platforms for added functionality.

2. Engage Legal Counsel and Conduct an Initial High-Level Legal DD

• Once your documentation is organised, have legal counsel go through a typical due diligence questionnaire to identify potential gaps or legal issues.
• Anticipate inquiries and address any legal concerns or complexities before they escalate into problems.

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THE BENEFITS OF BEING READY

Being well-organised builds trust and credibility during the due diligence process. It bolsters investor and buyer confidence, demonstrating your commitment to risk management and good corporate governance.

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CONCLUSION

Be proactive when preparing for your next funding round or exit.

By assembling documentation, conducting internal audits, and engaging legal expertise early, you can position yourself to close the deal quickly and efficiently while minimising risks.