4 Tips for Simplifying Due Diligence (and Why It's Even Needed)
It might not be the sexiest of entrepreneurial tasks, but as your business grows, hands down, it's one of the most important.
During a merger or acquisition, few things are more important than performing due diligence. However, this is far from the only time when due diligence documentation matters. Tax compliance audits, onboarding new clients or entering a joint venture with another company are all situations in which your own due diligence can streamline operations and improve decision-making.
For startup founders, due diligence plays a key role in their ability to gain venture capital funding. As Business Insider reports, this documentation is especially important for earning the trust of potential investors, particularly when in-person, face-to-face meetings aren't possible.
While due diligence documentation may not always seem as urgent as marketing or other growth tasks, giving this the attention it deserves now will make things easier for your business in the future, and these tasks should be top of mind.
1. Anticipate the needs of due diligence requests
It's important to understand the due diligence requests your business might face in the future. This will help you prepare needed documents well in advance so you can quickly deliver them to buyers, investors and others.
Financial profiles, documents outlining operational procedures and growth projections are commonly requested by funding partners or potential buyers. The more detailed documentation you can provide, the easier it will be to gain their trust and achieve a favorable deal.
An early analysis of due diligence documents can also reveal potential issues with your business. In a blog post, BNY Mellon Wealth Management recommends, "Identify any potential red flags that a buyer may encounter as part of the diligence process and ensure that by the time the sale process commences, the seller has either eliminated the red flag, mitigated its impact on the business or has a detailed explanation for why the red flag exists and how the seller is addressing it."
2. Digitize your documents with a virtual data room
We live in a time when information is readily available at our fingertips. Organizations requesting due diligence documentation typically don't want to wait around for paper copies to arrive in the mail. Sending physical copies of vital documents can also prove risky if such items were to be lost or stolen while in transit.
To avoid these problems, many businesses are transitioning to virtual data rooms, which allow them to digitize all their important documents. Rather than needing to search through filing cabinets to find vital information, these cloud-based tools provide secure storage for everything from documents of incorporation and patents to sales contracts and minutes from shareholder meetings.
A McAfee study found that 87 percent of companies felt cloud services accelerated their business operations, while 52 percent also reported enjoying better security than when they had used on-site IT.
3. Adjust access permissions for individual users
You don't want those using your virtual data room to have too much access — or too little. In a blog post, Markus Mikola, founder and CEO of ContractZen explains, "When you consider that 70 percent of employees feel overwhelmed because of broken communication and fragmented information … you realize that access to information is a foundation of a successful business."
Continues Mikola, "Additionally, business data needs to be easily shareable with external parties. This includes business partners, potential clients and companies that might employ the business, all of whom desire to check that the company in question is above board and legitimate."
Making due diligence documentation easily accessible through your virtual data room can help in audits and funding pitches alike, but business owners must be mindful of their digital security. Individuals should only be given the minimum access permissions necessary to do their job, especially since research has consistently found human error to be a leading contributor to data breaches.
Be sure to audit permissions granted to external parties on a regular basis. Typically, they will only need this data for a temporary need, and permissions should be rescinded afterwards.
4. Organize documents and prepare explanations
Having your due diligence documents stored in a virtual data room is one thing. But quite often, the organizations requesting this documentation will want more than just the raw numbers. They will want an explanation of what this information means within the larger scope of your business operations.
As part of anticipating future requests, you should use your virtual data room to organize documents by category or by the client. This will make them easier to find and share when necessary.
Transparency will also prove vital during due diligence examinations. For example, preparing an explanation for a one-time purchase will help potential buyers better understand your actual valuation and profitability. Transparency in providing these documents and explanations will build trust and help you avoid misunderstandings later on.
The sheer scope of the documentation associated with even a small startup's operations can appear daunting at first, but you shouldn't let these important files become a roadblock in any stage of your company's growth. By taking action to simplify and streamline due diligence, you will be able to operate more efficiently and be better prepared for whatever the future might bring.
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