You have spent considerable time pulling your business plan together, contacting potential business investors, making management presentations and pitching your business plan to prospective business investors. Now you finally have a serious investor who wants to conduct "due diligence" before investing real cash into your business.
Great! What's "due diligence?
Due diligence is a thorough examination of available facts, references, books, records, etc. of your business and business plan.
And, what exactly should you expect during due diligence?
Skepticism...
Business investors want to be sure there are no skeletons in the closet and that your venture is not the next Madison Priest "black box technology" -- a revolutionary technology that claimed to allow ordinary phone lines to transmit data into people's homes at rates faster than fiber optics. By staging impressive demonstrations, Priest convinced private business investors and seasoned companies, such as Blockbuster and Intel, to invest money in his venture. In the end, Priest's 'magic box' was nothing but a high-tech hoax.
In addition to a detailed analysis of your financial statements, business investors will hone in on four key areas: finance, management, manufacturing, and marketing. Specific concerns in each area are as follows:
Finance
Cash. Cash is king. It's the lifeblood of all businesses - start-up or on-going businesses. Business investors know this. They will spend the time understanding your cash flow assumptions and, if you're an existing business, they'll analyze your cash management practices. Poor cash management or shaky cash flow projections are immediate red flags.
Profitability. Expect investors to compare your actual or projected gross margins from year to year. This provides a quick indicator of your historical or projected manufacturing efficiencies and pricing environment. It can also highlight potential control issues, excessive overhead, or under pricing strategies to capture market share.
Bank problems. Out of compliance financial ratios, scrutiny from banks, or suspect bank relations - personal or business - are all red flags to business investors about how you manage your financial affairs.
Outdated financials. The lack of monthly financial statements or detailed cash flow projections or, for an on-going business, statements that are not prepared on time are all indications of a loosely run operation or a lack of planning.
Management
Continual crisis. Business investors watch closely for signs of weakness in you or your management team. Constant interruptions by emergency phone calls and demands for immediate decisions are signs of disorganization and lack of management.
Substantial changes in key personal. Unusual turnover in key management positions can be viewed as a lack of leadership.
No changes in senior management for many years. An established company with little or no changes in the management team can indicate a stagnant business, not current in new methods or processes, or a very autocratic management style.
Lack of pride or enthusiasm. Seasoned business investors can just sense the true tempo and spirit of an operation and its management team. Ask them how they do it and they'll tell you it's a sixth sense or gut feel. Nonetheless, it is something they are looking for and expect to see and feel.
Manufacturing
Outdate methods and processes. Your manufacturing and service methods and processes provide a quick indication of your ability to compete in the markets you serve and shift gears if the business doesn't go as planned. Even if you're a start-up, business investors will want to know the methods and processes you plan to use to manufacture your product or provide the services you plan to offer.
Rejects. If you are already in production, investors expect you to know your reject rates, the problems causing them, and the quality controls you have in place. How you handle rejects is an important issue to business investors. Remember, rejects are not limited to only production rejects. They also include missed service calls, late deliveries, and other process failures.
Just in time (JIT). Inventory is often the first place business owners and entrepreneurs get into trouble. Too much of it and you can quickly run out of cash; too little and you'll quickly start missing deliveries and losing customers. How well you manage inventory and understand it is a key strength business investors are looking for in the management team.
Sales per employee. The measure of overall productivity is a good, simple benchmark investors can use to measure your historical or projected performance against other companies in your industry. Questions like: What is it that you plan to do differently than your competitors to allow you to use the number of employees you use or plan to use? Why do you think you can earn more or less per employee than the average for your industry?
Marketing
Market share. Be ready to compare your expected market share or changes in it to your competitors. Remember to only measure the relevant markets you serve. Also, avoid justifying your market share by taking small percentages of extremely large markets. "Our projections only assume we get 1% of this billion dollar market" is one of the most meaningless statements a business owner or entrepreneur can say.
Trade shows. Investors will be interested in the activity and interest your company's booth generates at trade shows compared to your competition. Some may even want to attend and observe the next trade show you attend. Be sure to take pictures, videos and conduct customer surveys to demonstrate and support the interest and activity surrounding your booth.
New products. What is the percentage of new products or services that generate future sales? How often will new products or services need to be introduced to maintain your market position? What is your success rate with new products and services?
Business investors are constantly trying to sniff out symptoms of trouble. It's important that you never mislead or deceive them. Most investors have extensive business experience and regularly see or have seen many different businesses and industries. The questions they ask often stem from their real world experiences. That's why it is important not to get defensive by their questioning.
Be prepared when potential investors want to get behind your business plan. Use this list to conduct your own review of your business. Then, like many successful business owners and entrepreneurs, take the time to tap into the knowledge and questioning business investors have to offer to improve your business and prepare for future investor meetings.
Mike Elia is a chief financial officer and an advisor to venture capitalists and leverage buyout specialists. His business plan ebook business plan secrets revealed shows how to make your business the most appealing investment choice to venture capitalist, bankers, and other business investors. For his free business plan guide business plan secrets revealed
Batchtown Chicago prom limo .. Lockport Chicago limo O’HareTammy, a skilled and gifted horticulturist, called me to discuss... Read More
As you reflect on this year and prepare for next... Read More
Car Wash Crime in the Hood. Apparently not everyone is... Read More
In my previous article, Step 1, your challenge for the... Read More
Passion. Passion alone can make your business successful. As an... Read More
Do you need grant funding for your nonprofit organization? If... Read More
If you've been thinking about starting a business, but are... Read More
If you are a non-operator owner of many work trucks,... Read More
Many of our nations 400,000 franchisees run their businesses out... Read More
Why should you describe your business to others in 5... Read More
A lot of business owners I've spoken with lately have... Read More
Get maximum results with minimum effort. Sounds great doesn't it?... Read More
Here are seven ways for owners of small businesses to... Read More
There are both fixed and mobile detailers. Consumers often will... Read More
Tap these treasures of ideas. The best money you can... Read More
If you discovered the bottom line in your business depended... Read More
A top executive called up me late in the night.... Read More
Gather round while I tell you the story of Kennebec... Read More
In today's marketplace the words 'job security' have become an... Read More
First you have to start with knowing your budget and... Read More
Do you like animals? Would you like to work for... Read More
Why does research and education play an important part of... Read More
How is your pipeline structured?I assume most of you have... Read More
If you own a mobile car washing, pressure washing or... Read More
If you've been considering incorporating your small business, you've probably... Read More
shuttle from Midway Munster are ..When do annoyances in a relationship become too much to... Read More
How many hours do you work a week? When was... Read More
All cities have a purchasing office and/or a procurement officer.... Read More
Passion. Passion alone can make your business successful. As an... Read More
With all the cabinet refacing business opportunities out there, you... Read More
If you are in the pressure washing business and are... Read More
1. Look Over Your Shoulder ? Of course, Punxsutawney Phil... Read More
There are several well-known truck washes in the Great State... Read More
The day care industry is expanding. There are now more... Read More
To have one of the popular in home daycare businesses.... Read More
Franchisor expansion policies are not as simple as one might... Read More
Service Cleaning Businesses must maintain their equipment in order to... Read More
Most new small businesses won't be in business this time... Read More
"What do you do?" It just might be one of... Read More
Last week we discussed the importance of performing an autopsy... Read More
Small business success is very similar to learning to walk,... Read More
Do you have all the customers your business can use?The... Read More
Recently one of my customers told me the chaos swirling... Read More
Here is an interesting case study of a company, which... Read More
As a franchisor I am always asked by new and... Read More
Being a small or home-based business owner can be loads... Read More
For many small businesses, the "S" corporation is the business... Read More
If an organization lacks a mission statement, it is worthwhile... Read More
1. Leadership Is Learned ? While many people appear to... Read More
What types of companies do you want to align yourself... Read More
Small Business |