Running a business is a lot of work. Apart from your products or services, you have to take care of all the elements behind the scenes.
For most business owners, it’s usually mixed feelings when there is an opportunity for mergers and acquisitions (M&A). But whether you feel great or uneasy, you’ve probably come to terms with this reality.
To ensure your business is in a great position for potential investors, you have to be due-diligence ready. This means you need to get all the vital details about your business ready for review.
But while it’s great to be due-diligence ready in preparation for mergers and acquisitions, you should also do it as a normal business practice. Doing due diligence goes beyond making your business look good for an investor.
These details are also vital to running your business and improving your strategy for future operations. Having said that, what are the benefits your business gains when it’s due diligence ready?
In this blog post, discover 9 big reasons why your business should always be due-diligence ready.
1. Improve trust and belief in your business
It’s a common occurrence to find businesses involved in shady practices. Naturally, these businesses will try to cover their tracks by hiding these details from prying eyes.
This is one reason an investor might usually be sceptical of a business they’re not familiar with. However, when you provide all the necessary documents about your operations, employees, and products, it shows that your business is legitimate.
As a result of this, you gain trust with a potential investor. Furthermore, these pieces of information boost their belief in your business.
A tool like ContractZen can help you organize all your contract, legal and financial documents in one place, so that a potential investor can have access to them in a secure, cloud-based virtual data room. It also provides tools to hold meetings to discuss, sign these documents, and improve trust.
Another useful tool to consider is SecureDocs, which allows you to save time with deals and transactions by providing you with an intuitive virtual data room.
2. Displays the total value of your business
Understanding the total value of your business is impossible unless you analyze your assets and liabilities. What is the future prospect for your business?
Other pieces of information that could determine your business value include your employees, products or services, intellectual property, and rate of increase in your customer base. For service businesses like apps or software, the rate of usage by users also show the value of your business to an investor.
Furthermore, credit and loan obligations help to analyze the financial strength and value of your company. By doing due diligence, you can avoid underselling your business and ensure you set the right price.
With this knowledge, it’s also easier to take steps to improve the value of your business before the sale.
3. Determine market size
Any serious investor wants to know how they can recoup their investments in your business and make more profits. A major determinant of this is the market size.
A furniture maker who only serves New York is a different proposition from IKEA. Even though they’re in the same business, their market sizes are totally different. Gartner recommends viewing market size opportunity as a four-tiered structure, as illustrated below.
The market size shows the number of potential customers you can serve and ultimately, revenue. With an accurate assessment of the market size, an investor can think of expansion plans to increase the market size or how to maximize revenue from the current market size.
4. Shows the team structure and level of competence
The team structure of a company tells a lot about its operations. It also shows clearly who is in charge of various departments. Every business has a team structure that’s effective for their business operations.
In some cases, you can have different titles across businesses doing the same job. For instance, a chief marketing officer (CMO) in one business can be in charge of marketing, while the marketing manager will do the same job in another business. You can even use a free tool like Organimi to create an org chart that helps you visualize the hierarchies at play.
With your team structure, you can show the hierarchy of your employees and their duty in your daily operations. In some cases, this can help you find redundant posts that should be eliminated.
5. Know the employee headcount and output
A company is only as strong as its employees. Of course, the strength of a company isn’t only in the number of its employees but how effective they are.
However, the employee size is an important detail of any business since you have to pay salaries for these employees.
Apart from the number of employees, it’s also vital to analyze the contracts signed with each employee. This is vital information in the case an employee has to be fired.
6. Know the customer base size
The aim of every business is to increase its customer base and revenue per customer. However, without proper records, it can be difficult to know your customer base if you’ve been in business for a long time.
Another factor that affects customer base size is the type of business you do. Is it a subscription-based service or a product that customers can buy once?
Apart from the general customer base, doing due diligence will show your revenue per customer, the number of repeat customers, and big customers. From these details, you can see your potential to compete in the market. More so, you can adjust your strategy to gain more customers and increase revenue per customer.
7. Determine the potential for growth
Doing financial due diligence can help to track your performance in the past. How successful was your company in achieving its targets in the past?
Based on this analysis, you can identify weaknesses in your business operations that affect its sales and profits. By fixing these weaknesses, you set a platform to improve your business and its valuation during the process.
Also, it becomes easy to forecast revenues for a future period based on your current performance. Furthermore, you can use technology to make the process easier. In a study by Merrill Corporation, 52% of professionals believe technology can help with financial modeling while 41% believe it can help with visualizing financial performance data.
Through your financial due diligence, a prospective investor can identify your business’s potential for growth.
8. Keep track of stakeholders and board communications
For companies with stakeholders and board members, these people are involved in all important decisions for the business. If your business has a board of directors, doing due diligence means you’ll have to track their communications for a long period.
Likewise, you’ll see the contribution of each board member to the running of the company. Based on the board meetings, a potential investor can see the direction of the company.
Is the company conservative? Or they take pride in innovation even if it’s risky? Through this, an investor can decide to invest in a business that suits their operating model.
9. Helps an investor to make their decision
For an investor, buying a business is a risk. For instance, statistics show that half of businesses will fail within 5 years.
Therefore, an investor will naturally do their due diligence before putting their money in a business. Obviously, this is to avoid making a costly mistake.
But regardless of that, as a business owner, you should do the same. Because you’re more likely to get the most accurate information through internal due-diligence rather than an investor carrying out external due-diligence.
If you’re unable to do due diligence for a business you’re running, that shows a negative image of how well you’re running the business. By doing due diligence, you can help an investor decide whether your business is the right one for them.
Being due-diligence ready is an activity that every business should practice. It gets your business ready for mergers and acquisitions.
And, even without an acquisition in sight, being due-diligence ready can help you find weaknesses and growth opportunities to improve your business results.