The process of investment holds significant risk, and fiduciaries hold a responsibility to investors to guard against that risk. Due diligence is an in-depth investigation into a potential partner or subsidiary's status prior to finalizing a deal. While the classic form of due diligence in capital market transactions has focused on the numbers, the changing role of corporations in society has meant the introduction of "soft" due diligence. This looks not only at such things as capitalization, stock price history, ownership, and balance sheets, but at company culture.
The human capital element of soft due diligence is an important indicator as to how a company might survive a change in leadership or other disruptions after the deal takes place. As Emerald Insights noted, soft due diligence also looks at a company's sustainability from a social, environmental and economic perspective, given increasing pressure on companies to be so. In both hard and soft due diligence, access to information is critical for auditors and financial institutions to do their jobs right. Here are four ways this process unfolds and how data can help.
Seed Investment: The Founders
Typically entities who seek seed investment are in the nascent stages of growth. They may or may not have achieved product validation from the marketplace or have a history of sales. For that reason, seed investors are betting largely on the people at the helm of the new company. They may therefore look into those individuals' backgrounds, including legal or financial history and reputation within the industry. Due diligence will make sure the new company has a proper legal structure in place, and that there are no red flags in its legal history. Sometimes, potential investors will run a test of any technical elements of the main product or contact current clients to guage satisfaction.
In order to expedite these processes, investors can run a title search of any assets owned by the startup's founders and prepare a data report of any property in the name of the company. This kind of information reveals encumberances, such as liens on assets because of pending litigation.
Venture Capital: The Fit
As with investment at the seed stage, venture capital due diligence may or may not include investigation into a company's financials. The VC firm typically starts with a preliminary screen to ensure the potential investment is a fit with the firm. After this initial go-ahead, there may be more in-depth inquiries into the size of the market, viability of the product, and background of the founders. At this latter stage of business due diligence, investigators may do a deep dive into the fledgling company's access to critical resources, business plan, potential customers, and market. Founders can expect a thorough background review, not only of the company's past legal history and financial dealings, but their own as well.
Completion of business due diligence necessitates access to legal documents, made significantly easier with the use of a digital document images and retrieval service. DataTree's platform has an additional search functionality which makes the search for relevant documents significantly more efficient than plodding through boxes of paper or manually scanning digitized paperwork.
Private Equity: The Paper Trail
A private equity investor is taking on significant personal risk when choosing to invest in a new entity. It follows, therefore, that the process of due diligence will involve not only insights into company culture for any hint of problems with execution, but also hard due diligence in the form of legal documents, liabilities, and current contracts. Specifically, a private equity checklist prior to investment might include an analysis of corporate records, stocks documents, patents or licenses, employee contracts, employee benefit statements, equipment leases, tax schedules, and all other information that has a direct impact on the legal status and potential liability held by the company.
A trusted analyst is often tapped to look at the past five years of the company's financials in detail, or from the time of founding if the company is less than five years old. Clearly a detail-oriented and cumbersome process, this is made easier with an online property report service. Using DataTree's property and ownership reports, fiduciaries can research lease agreements, mortgage histories, and property records.
Investment Banks: The Line-Item Detail
Perhaps more than any other kind of investment, banks weigh heavily on the side of hard due diligence. A bank will review its history with the potential partner, conduct an in-depth financial analysis of present and past performance of the company, review market size and strategy, potentially conduct site visits to operational headquarters, as well as review all legal and personal history of the company and its leaders. Again, data is invaluable and necessary to complete this kind of rigorous due diligence. DataTree's Mortgage Lending service provides property information valuable to all potential investors, including valuations, past and present ownership details, encumberances, and legal liabilities.
Improve Due Diligence Efficiency
Regardless of the stage of capital market, due diligence is a detail-oriented, information-intensive process. The availability of information can make this process even more time-consuming, complicated and burdensome. DataTree can make it more efficient and accurate. Sign up for a free trial today to see what DataTree can do for your organization.