Due Diligence trip preparation - avoid the nightmare

I’m on my way to Switzerland to conduct an all-encompassing site visit/Due Diligence(DD) visit for a Private Equity fund we work with who are looking to invest €20m in this company. A term sheet has not yet being signed however we are close to it – so this visit is both still investigative and confirmatory DD in one.

It got me thinking on how over the years I have prepared for DD trips and what has worked best. Also now that I work with growth companies more than when I was a full-time VC , on how the company can best manage a DD visit from nosey nervous VCs. Both sides want to avoid the nightmare of a DD trip which was to get you over the hump in the investment process and on the downhill slope to a close – turning into a lot of blank stares, as requested data and questions are not answered satisfactorily.

As a VC – preparation is vital – the thought process of what you want to achieve from the visit and how best to make sure the company is in a position to deliver (or not ass the case may be).

So, simple things as a VC:
A. Write up your investment thesis or hypothesis for the investment and glean from this your Key Questions – as in: Write down on a piece of paper “What do we need to believe to make this a great investment?” and then the bullets you have beneath this question – these are the questions you conduct your DD on. An example: “We need to believe the target market will value the company’s value proposition enough buy the product in X volume within Y months”. How to run a DD on such a question – well you can analyse past sales, trends, competing product performance in head to head sales competitions and customer calls with important clients. Set out how you wish to prove/disprove your assumption and what data you specifically need the company to provide.

B. Write up a detailed question set, segmented by areas (finance, strategy, commercial, legal, team) and send it to the firm as least 5 days in advance.

C. Send a proposed schedule for the day in advance with time slots for what members of the management team you wish to speak to (segmented again in the same way as the question set above).

As a company – preparation is vital (have I said that before….:-|):

A. Have each management team member ready for a long, tiring detailed session on their respective areas. A VC WILL play devil’s advocate and (not purposely I hope) potentially get under the skin of management who want to be doing their dayjob. Hsve someone guess and pre-empt where the questions will go. They may not have put all the questions on the DD question set sent through. If you cannot answer or back-up certain areas or claims – be honest – the VC will see this as a risk factor and should have priced the deal for it.

B. Have back up materials ready for each area – as in: If you have a technology session – have documents/presentations with the patent descriptions ready, or perhaps an independent review by an expert, or customer testimonials prepared in advance.

C. Feed the VCs and don’t let them get hungry and grumpy. Basic human nature and charm still works in any situation

I will stop there as I have to prepare myself for the meetings. Let’s hope they go well.

By John Rowland, Managing Partner