What is your company doing to get ready for the due diligence stage of your next fundraising or M&A deal?
Ideally, you’ve got an experienced team of legal, accounting, and finance experts ready to guide you through the deal process from due diligence to closing, but the key to a successful deal starts well before the deal kicks into motion.
Once the term sheet is negotiated, the due diligence process starts. You may think it’s just a “check the box” exercise. Investors will often tell you that is the case to put you off your guard. Nothing could be further from the truth. Experienced investors will scrutinize your business thoroughly, looking for risks that could threaten or limit the business. Depending on what they find, they may kill the deal or use their findings as leverage against you to negotiate stiff terms or a lower price.
Most companies do not make it through due diligence. Often because they wait until the investor sends the due diligence list before getting organized. They scramble around to find everything on the list and race to send it all to the investor. Then they fumble through the deal process, trying to answer questions on the fly – hoping the investors won’t find the skeletons in the closet. Spoiler alert: experienced investors find the skeletons!
Successful companies prepare ahead of time. They engage their team before they approach the investors. They proactively organize their documents, identify issues, and prepare thoughtful responses beforehand. Prepared companies sail through due diligence with confidence, engaging in productive discussions with investors and driving the deal toward closing.
But how to prepare? Engage your legal, accounting, and finance advisors early in the process. Investing in good advice early on yields better deal terms and can save you millions on the back end.
At Soloway, we offer a service that ensures our clients and their companies are ready for due diligence—even more ready than the other side of the deal. Here’s how.
Organization and Preparation is Everything
Have your legal team prepare a well-organized data room and thoroughly review your documents to identify any issues that the investors may uncover during due diligence. Legal counsel should also interview your management team to dig into the risks and issues in the business. From litigation to employment, licensing, IP, and corporate issues, you’ll want to uncover as much as you can in advance so that your counsel can help you fix what needs to be fixed, clean up issues, and prepare explanations and responses before due diligence begins. Similarly, your finance and accounting advisors should review your financials to highlight any potential issues or inconsistencies that might be concerning to investors.
Investors are looking for confident management teams who are in command of their businesses. The advantage goes to management teams who answer questions thoughtfully, back up their claims with real data, and engage in thoughtful discussions about the business. Prepare in advance so that you are driving the bus instead of the investor.
Mock Investment Committee
PE and VC funds have investment committee that evaluate investments, weigh the risks and benefits, and decide whether to proceed with an investment or acquisition. These committees are typically composed of senior partners and key decision-makers at the fund. The committee reviews presentations, financial models, and due diligence reports. They rigorously question investment assumptions and analyze every aspect of the business, its risks, and its growth potential. In short, they put your deal through the ringer before they proceed with any investment.
To prepare for this intense scrutiny, your company should conduct its own mock investment committee. Here’s how to set it up:
- Gather a Team: Bring together advisors, mentors, or industry experts who can provide objective, critical feedback to simulate the role of a real investment committee.
- Deal Champions and Opponents. Appoint one person on the committee to act as the deal champion and one person as the deal opponent. The champion tries to sell the deal to the committee. The opponent argues against the deal.
- Prepare Your Presentation: Develop a thorough presentation that includes your business plan, financial projections, market analysis, and other relevant documentation that would be reviewed by a real investment committee.
- Simulate the Meeting: Conduct the mock meeting as if it were real. Present your materials and allow the mock committee members to ask challenging questions about your business model, financials, and strategy. The deal champion should present the case for the deal and argue for it. The deal opponent should present a case against the deal. Allow the committee to interrogate both of them and deliberate without them present.
- Identify Weaknesses: After the simulation, debrief with the team to identify any weaknesses, potential risks, and gaps in your presentation or strategy.
- Refine Your Materials: Use the feedback to improve your materials, address potential concerns, and develop thoughtful responses to anticipated questions. This preparation will better equip you for due diligence, negotiations, and the real committee meeting, enhancing your chances of closing a successful deal.
You can only explain away so many items in due diligence or during the investment committee process. Eventually, the more you have to explain, the less likely the deal is to move forward.
By going through this exercise beforehand, you can proactively address potential issues and be better prepared for the real diligence process with actual VC or PE investors.
At Soloway, we’ve leveraged our extensive network of industry clients and partners to create mock investment committees that prepare clients for diligence and committee presentations in advance. We help clients to create a committee that knows your industry, relevant areas of law and finance, and understands the investment process.
As it has been said, we rise or fall to our level of preparation. Successful performers practice relentlessly. The mock committee enables you to proactively identify and address potential issues and practice selling the deal and responding to objections. It is a priceless process. . Walking into an investment committee without preparing is a suicide mission for your hopes and dreams.
Don’t Get Beat in the Negotiation
Negotiations do not stop when the term sheet is signed. Every stage after that is a negotiation from due diligence to closing.
VCs, PE funds, angel investors, and acquirers are skilled, seasoned negotiators. Most business owners only negotiate funding and M&A deals a few times in their career. Professional investors negotiate these deals every day. They have a keen eye for gaps and issues that they can leverage against you to negotiate the best deal for themselves – often at your expense. That may mean a lower valuation of your business, longer earn outs, or severe restrictions on how you run your business.
We’re not trying to paint a nefarious picture. These investors are successful for a reason. As much as they may want to help your business, they have an obligation to protect their capital first. It’s not personal—it’s just business.
To successfully navigate negotiations with an investor, it’s crucial to involve your attorney early in the process. Your attorney can help you prepare by clarifying your goals, understanding your valuation, and identifying key terms that are non-negotiable. They can also provide valuable insights into how your company’s strengths align with the investor’s interests, helping you to present your case effectively. Engaging your attorney early ensures that your financials, milestones, and future plans are clearly communicated and that any potential legal issues are addressed before they become obstacles. During negotiations, your attorney can guide you on which points to compromise and which to hold firm on, ensuring that the final deal supports your company’s long-term success. By working closely with your attorney, you’ll be better positioned to build a partnership with the investor that benefits both parties.
Strengthening Your Internal Champion
Identifying and empowering an internal champion at the investment fund is a great strategy for successfully closing a deal on favorable terms for you and your team and building a long-term relationship. The internal champion is typically someone within the fund who strongly believes in your company’s potential and is willing to advocate for you throughout the decision-making process. To maximize the effectiveness of this relationship, it’s essential to identify this individual early on and ensure they have all the information and support needed to make a compelling case to the rest of the investment committee.
Start by cultivating a strong rapport with your internal champion, providing them with regular updates, key data points, and insights that reinforce your company’s strengths and potential for growth. Be transparent about both your successes and challenges, as this builds trust and enables your champion to speak with confidence on your behalf. Additionally, consider how you can position your champion for success within their own organization—whether by helping them anticipate tough questions from other committee members or by aligning your pitch with the strategic goals of the fund.
Leveraging your internal champion effectively not only increases the likelihood of getting the deal done but also sets the foundation for a strong, ongoing relationship with the fund. Preparing in advance enables you to better equip your internal champion to support you through through due diligence, negotiation, and investment committee processes successfully. Maintaining open communication with your internal champion can also help ensure that both your company and the fund are well-aligned for long-term success after the deal closes.
Legal Health Check
Legal health checks are a great way to get ahead of the due diligence process. By conducting a legal health check, you can identify the key issues that are likely to be raised during due diligence and show investors that you have a plan to address those issues – or at the very least, to prepare your response to those issues when engaging with the investors. The more prepared you are, the more likely it is that you will get a yes at the end of this process.
Don’t leave it to chance. Contact Soloway Legal today to discuss how we can help you prepare for a successful investment or M&A transaction.
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