Documenting Success for Expansion

"Subject to due diligence." This is the scary qualifier that investors and lenders use to negotiate tougher funding terms with business owners.Due diligence is the catch-all investigative process in which funding sources take a deeper look at a company’s organization, business agreements, customer relationships, intellectual property and competitive prospects for growth. Funders also learn a lot about how businesses manage administrative details and respond to information requests under pressure.Business owners who embrace, rather than avoid, due diligence have the best chance of receiving expansion capital from lenders and investors. This is the time to show off your company’s strengths, not expose its weaknesses.Here is what you need to know to breeze through due diligence with confidence:Speed matters. Prepare a preliminary "due diligence package" in advance of first meetings with funding sources to avoid a fast scramble to respond to sizable information requests. In addition to the company’s historical financial records, assemble copies of all major agreements, corporate organization documents, UCC filings, breakdowns of the intellectual property ownership structure, etc. Also, assemble documents that support key elements of your business plan, including market research, analysis of the competition, and research and development timetables.

Corporate organization. Organize and update your company’s corporate records, including board minutes, plus records of all outstanding shares of common stock, preferred stock, warrants and stock options. Investors and lenders pay close attention to a company’s current ownership structure.Confidentiality. Mark all company documents as confidential regardless of whether you have a signed confidentiality agreement with the investors or lenders. This is a good practice, especially if a company is developing technologies with potential patent or other intellectual property rights.Make it easy. There is nothing worse for funding agents than getting a box load of unmarked documents or being pelted with random electronic due-diligence documents. The haphazard approach won’t help you hide problems, just jeopardize your funding prospects due to lack of order. To help funding sources learn about your company with ease, develop a descriptive inventory of documents. Number and label all documents to match your inventory list. Update the list as you create more due-diligence documents.Go digital. You can save money and trees by scanning documents into digital files or creating a secure, password-protected website for funding sources to access your key information. Keep one hard copy of your documents for on-site due-diligence reviews.Growing costs. Lenders are charging business owners four- and five-figure fees to cover their legal expenses and all other costs associated with due diligence. Venture capital funds have not yet joined this excessive fee-grabbing party, but don’t be surprised if they pass along some of their transaction-related legal bills for payment after a deal closes.Negotiate customer calls. One of the most troubling aspects of due diligence for business owners is that financial-transaction agents might call key customers to ask questions. Owners worry — for good reason — that the questions might highlight the company’s financial needs and undermine their customer relationships. While investors might not back down from their need to confirm top sales relationships, business owners can negotiate over the interview script and who will be contacted.I find that business owners all make the same mistake when managing the due-diligence process. In the rush to complete the work, they get sloppy. Documents sometimes contradict the owner’s representations, or the numbers just don’t add up.If a mistake is made, own it! It’s unacceptable to blame staff members for releasing information that is incomplete or inaccurate. Because it’s your company, it’s your job to review the details that might advance or jeopardize important funding opportunities.Susan Schreter is a 20-year veteran of the venture finance community and a university educator in entrepreneurship and social enterprise development. Schreter is the founder of TakeCommand, a community service organization that offers the largest centralized database of venture capital funds, angel investment clubs, incubators and microfinance lenders in the U.S.