You’re almost at the finish line of your fundraising journey, and the last thing you want is to stumble before you cross it.
Investors need solid evidence before they can commit to an investment. Even when they love your product or service, they’ll need to review documentation that proves your company will generate a return.
If you haven’t put in the effort to organize your due diligence documents, you could be jeopardizing your raise. Even if you’re not actively fundraising, you’ll need organized due diligence documents if you get hit with a surprise audit or legal action you didn’t anticipate.
This is why it’s so important to invest the time in preparing the right due diligence documents, all stored in one secure location. Keep reading to find out exactly what you need for a complete package of due diligence documents, from the financial to the legal.
What are due diligence documents?
Due diligence documents are the financial, legal, and operational documents reviewed to evaluate the viability of a business before an acquisition, merger, or investment. A team of experts will review due diligence documents as one of the last steps before finalizing a deal.
Standard due diligence documents are often grouped into five categories: corporate governance, financial, legal, asset, and intellectual property. As an “anchor document,” your balance sheet also provides an overview of what your company owns and owes so investors or buyers can get a good sense of potential return on investment.
Corporate governance due diligence documents
Corporate governance documents show investors how you govern and manage your company.
After reviewing corporate governance due diligence documents, investors should walk away with complete knowledge of your company’s policies and procedures, risk management processes, and compliance with legal and regulatory requirements.
Here are five types of corporate governance due diligence documents you should collect:
- Board minutes: Minutes help investors understand how your board oversees your company’s management, identifies risks, and makes strategic decisions. Board minutes also reveal any conflicts of interest or obstacles that could affect your company’s reputation or financial performance.
- Corporate structure chart: Your corporate structure chart helps investors understand your company’s ownership and high-level functions like CFOs and CTOs, and their reporting lines, which is crucial for identifying important relationships and accountability.
- Policies and procedures: Policies and procedures demonstrate how your company abides by laws and regulations, manages employee conduct, and mitigates operational risks.
- Employee documents: Employment agreements, benefits plans, and HR policies help investors assess your company’s workforce and any associated risks, like labor disputes or litigation.
- Environmental documents: As climate regulation becomes more established, investors are beginning to expect companies to disclose their impact on the environment. This will mean a “disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant’s audited financial statements.”
Financial due diligence documents
Financial documents inform investors about the financial health and performance of your company.
After reviewing financial due diligence documents, investors should walk away with complete knowledge of your company’s profitability, liquidity, cash flow, and overall financial risk.
Here are six types of financial due diligence documents you should collect:
- Financial statements: Investors need these as a snapshot of your company’s financial performance over a specific period of time, including revenue, expenses, assets, and liabilities.
- Tax returns: Investors and buyers assess tax returns to understand your company’s tax liabilities and compliance with tax laws and regulations. They use this information to evaluate any potential tax risks or liabilities associated with the business.
- Accounts receivable and payable: These documents clarify outstanding debts and obligations to your suppliers and customers. Your investors will use these documents to evaluate your company’s cash flow and ability to manage working capital.
- Capitalization table: Investors will want to know about existing shareholders and the number of shares outstanding, so they understand your company’s ownership and control structure and any potential conflicts of interest.
- Financial projections: You’ll need to provide a sense of your company’s future financial performance, including revenue, expenses, and cash flow, so investors can use their own models to assess their validity and identify other areas of potential growth.
- Audit reports: If you’ve done any independent assessments of your company’s financial statements by an external auditor, investors will want to compare these to their own evaluation models.
Legal due diligence documents
Legal documents inform investors of any legal risks associated with your business. After reviewing legal due diligence documents, investors should walk away with complete knowledge of the legal structure of your business, any potential legal liabilities, and your level of compliance with applicable laws and regulations.
Here are five types of financial due diligence documents you should collect:
- Articles of Incorporation and bylaws: Documents like this clarify the legal structure of your company, including its governance structure, ownership, and management.
- Contracts and agreements: Investors want to know about any contractual obligations with customers, suppliers, employees, etc., so they can assess your company’s legal and financial obligations and any associated risks with your contractual relationships.
- Litigation documents: If you have any ongoing or potential legal disputes, like lawsuits, arbitration, or regulatory investigations, investors want to know about these risks so they can at least have a plan to deal with them.
- Compliance documents: You’ll need to demonstrate your company is compliant with applicable laws and regulations, like labor laws, environmental regulations, and data privacy laws. This will reveal any potential exposure to regulatory fines or penalties.
- Permits and licenses: If you need certain permits and licenses to operate your business, investors will want to know you have them in the first place — but they could also help determine the value of your company’s regulatory licenses, which could apply to the deal.
Asset due diligence documents
While there may be some overlap between asset documents and financial/intellectual property documents, these are important for assessing the true value of your company.
Here are four types of asset due diligence documents you should collect:
- Real estate documents: Inclusive of your owned or leased real estate assets, real estate documents are titles, deeds, mortgages, and lease agreements. These documents help investors assess the value, condition, and legal status of your real estate assets.
- Equipment and inventory documents: Inclusive of your company’s owned or leased equipment and inventory, equipment and inventory documents are purchase records, maintenance logs, and lease agreements.
- Intangible asset documents: Intangible assets are things like goodwill, brand reputation, and customer relationships. Any documents that demonstrate the potential value of these assets can influence the overall valuation of your company.
- Insurance documents: These documents are your insurance policies, including coverage limits and claims history. With these documents, investors can evaluate the adequacy of your insurance coverage and make recommendations on alternatives.
Intellectual property due diligence documents
You’ve worked hard to build your company, but it’s more than just equipment, office space, and people. Your ideas are a part of your company, too, and they require legal protection.
Intellectual property documents prove ownership of your ideas, which influences the value of your business. Here are six types of intellectual property due diligence documents you should collect:
- Patents: Your company’s patents, including their legal status, scope of protection, and any potential infringement risks, help investors evaluate the value and risks associated with your company’s patent portfolio.
- Trademarks: Whether they’re existing trademarks or pending trademark applications, include these documents to help investors assess their existing or potential value, in addition to any risk of infringement claims.
- Copyrights: Your registered copyrights and any pending copyright applications inform investors of the value and scope of your company’s copyright portfolio.
- Trade secrets: Investors will need to see any confidential or proprietary information, like customer lists, algorithms, or processes. Your investors will be able to advise on the protection of your trade secrets based on any risks they identify based on their experience.
- Licenses: Your licensed intellectual property, including any license agreements or royalty arrangements, will help investors determine their value and scope.
- Domain names: Your domain names for your main brand and any subrands are a form of intellectual property, too, so don’t forget to include these as part of your package.
Balance sheet due diligence document
Your balance sheet is one of the most important documents you can provide investors during a raise.
When you give investors a balance sheet during the due diligence process, you’re giving them an overview of the current state of your company’s finances. While your balance sheet doesn’t demonstrate projections or past trends, it does answer the question, “What is the financial health of this business right now?”
To answer that question, the balance sheet weighs assets against liabilities and shareholder value. This includes:
- Assets: Cash on hand, accounts receivable, property, inventory,
- Liabilities: Debt, wages, accounts payable, deferred taxes
- Shareholder equity: Total assets minus total liabilities, meaning the amount that would go to shareholders after all debts are settled
The balance sheet takes these values and demonstrates the overall health of the business with this formula:
Assets = Liabilities + Shareholder equity
Assets should always be equal to liabilities and shareholder equity, because the company has paid for what it owns either by borrowing money or taking it from investors. If the balance sheet doesn’t balance, there’s been an error and the numbers need to be re-examined.
Investors like to see a balance sheet so they can assess debt-to-equity ratio, which is a company’s total liabilities compared to its shareholder equity. This lets investors know how much your company is reliant on debt — the higher the ratio, the more risky the investment. But at the same time, if your ratio is too low, it could mean your company isn’t taking on enough debt to invest in the future of the business.
Overall, the balance sheet is a great way to communicate the health of your business in the short term. With a balance sheet, investors will understand whether or not you have enough cash on hand to fulfill short term obligations — which will be your starting point for growth if you investor decides to go ahead with the deal.
A better way to compile due diligence documents
When your due diligence documents are in one secure database, you’ll be saving time for yourself and for your investors. With DocSend’s virtual data rooms, you’ll be sending investors one single link to access all the due diligence documents they need.