Mastering Proactive Due Diligence

Mr FamilyOffice
February 09, 2024

Mastering Proactive Due Diligence

I look at a lot of deals. I have also pitched a few in my time

After a deal has been approved in principle, the hard work starts as due diligence kicks in

So many deals fall apart in the due diligence phase. Promises are not backed up, critical information is uncovered, or discrepancies emerge that cast doubt on the viability of the deal

But good deals can also lose momentum in the due diligence phase as delays and uncertainties arise

Time-sensitive opportunities may slip away, and stakeholders' confidence may wane if the process is not managed efficiently

This is a disaster for the investor and the deal-maker alike

There is a better way

Rather than regarding due diligence as a passive process, answering the questions and providing data as it’s requested, sponsors should adopt a proactive approach to due diligence. This helps build trust, saves time and ultimately improves your chances of success

Here are 10 ways to use proactive due diligence to get ahead:

1/ Disclose potential conflicts and risks 🕵️‍♂️

This is a big one

At the outset of the due diligence process, lay your cards on the table. Be up-front about potential conflicts and risks

Conflicts and risks will be discovered, they are always discovered. So you can bury your head in the sand until they are raised. At this point, the potential investor will start to question the deal and the people

Or - you can get in front of the issue, disclose the risk areas and control the narrative and start to build trust

It may feel counterintuitive to highlight risks, but addressing these issues at the start not only sets the stage for an open and transparent relationship but also saves everyone's time

2/ Prepare comprehensive documentation 📑

Again, it’s about being proactive, not reactive

Realistically you know the data that will be required, so why wait to be asked?

Realistically you can prepare 90% of your data room before a single request has been made

Some generic examples:

➡️ Financial records: Balance sheets, income statements, cash flow statements, and financial projections.

➡️ Legal documents: Contracts, agreements, leases, licenses, permits, and intellectual property filings.

➡️ Corporate governance documents: Articles of incorporation, bylaws, shareholder agreements, and board meeting minutes.

➡️ Tax documents: Tax returns, tax assessments, and correspondence with tax authorities.

➡️ Due diligence reports: Previous due diligence reports, if available, and responses to prior due diligence inquiries.

➡️ Regulatory compliance records: Certifications, permits, licenses, and compliance reports.

➡️ Employment records: Employee contracts, organizational charts, and human resources policies.

➡️ Intellectual property documentation: Patents, trademarks, copyrights, and licensing agreements.

➡️ Real estate documentation: Property deeds, leases, titles, surveys, and environmental assessments.

➡️ Insurance policies: Coverage details, claims history, and insurance agreements.

➡️ Customer and supplier contracts: Agreements with key customers and suppliers, including terms and conditions.

➡️ Marketing and sales data: Market research reports, sales forecasts, and marketing plans.

➡️ Technology and IT infrastructure: Software licenses, IT contracts, and data security protocols.

➡️ Environmental, Social, and Governance (ESG) documentation: ESG policies, sustainability reports, and corporate social responsibility initiatives.

➡️ Litigation and dispute resolution records: Legal proceedings, lawsuits, and settlements.

➡️ Financial due diligence materials: Audited financial statements, financial models, and valuation reports.

➡️ Risk assessments: Identification of potential risks, mitigation strategies, and risk management plans.

➡️ Operational documentation: Standard operating procedures, production schedules, and supply chain information.

➡️ Management bios and resumes: Background information on key executives and management team members.

➡️ Miscellaneous: Any other relevant documents or information specific to the deal or industry.

3/ Establish clear communication 🗣️

Communication is king

Appoint a highly competent frontman/woman

This person liaises with the investors and should be able to handle inquiries promptly and transparently. Delayed, inaccurate or inconsistent responses can kill a deal outright

While due diligence can be an admin-heavy role, make sure that the contact has sufficient experience to see the bigger picture

4/ Demonstrate compliance 📜

Don't wait for someone to ask – shout it from the rooftops!

Showcase your adherence and compliance to regulations, industry standards, and best practices

Wear it as a badge of honor and a differentiating factor

5/ Provide case studies 📊

If you can, share your success stories

In a case study, you can showcase your past successes and demonstrate your ability to deliver results. By presenting verifiable examples of how your business has overcome challenges, capitalized on opportunities, and achieved tangible outcomes, you provide prospective investors or partners with concrete evidence of your track record

Case studies add depth and credibility to your offering. It allows stakeholders to see firsthand how your business operates in action, rather than relying solely on abstract promises or projections

Case studies can serve as a powerful tool for building trust and confidence. They demonstrate your transparency and willingness to share real-world experiences, which can help alleviate concerns and uncertainties among investors or partners

6/ Offer references 📞

References and testimonials are a great way to build credibility

Adding contacts from previous clients or partners who can vouch for your performance adds a layer of credibility to your due diligence pack. These individuals should have firsthand experience working with you and be able to speak to your professionalism, reliability, and ability to deliver results

7/ Conduct a third-party audit 🧐

This takes your due diligence to the next level

It often makes sense to commission a third-party consultant to carry out audit procedures on your materials

A third-party audit from the likes of the Big Four accounting companies can demonstrate confidence in your product, can save time later on and can build trust in the process

For often a relatively small cost, weeks or months can be saved in the due diligence process

8/ Maintain a strong online presence 🌐

Step 1 of any due diligence usually starts with a Google search. This usually provides insights into a company's reputation, online presence, and public perception. Therefore, businesses must ensure that their website and social media profiles are not only up-to-date but also reflect professionalism and credibility

Your website is a digital storefront and should be well-maintained and professional. It’s an easy way to showcase achievements and highlight corporate values

Any negative online stories or unfavorable reviews should be addressed promptly and transparently. Ignoring or dismissing negative feedback can undermine trust and credibility, potentially derailing the due diligence process

9/ Emphasize ESG commitments 🌱

It is becoming increasingly important to formally document your ESG commitments

It’s now common practice for investors and banks to require ESG reports, so providing ESG data or reports can both demonstrate your green credentials and speed up the due diligence process

10/ Be proactive and flexible 🚀

As the due diligence process starts, you can start to get a read on the investor. Try to anticipate the questions before they're asked and be ready to adapt your strategy based on concerns raised

Being slow, reactive, or incomplete can derail the due diligence process, so proactivity and flexibility are key to maintaining momentum through the due diligence phase

The due diligence phase is the start line, not the finish line 🚦

A proactive due diligence strategy is about taking charge of the process, anticipating needs, and demonstrating transparency and credibility from the outset. By following the steps outlined above, businesses can build trust, save time, and improve their chances of success

Ultimately, viewing due diligence as a proactive endeavor rather than a passive one can lead to smoother transactions, stronger relationships, and greater success in the long run

𝕏 highlights

On topic - corporate governance red flags 🚩🚩

Corporate governance: not sexy, but essential
Failures in corporate governance can be fatal when you're:
- building your own business
- directing an organization (incl. family offices)
- conducting due diligence on a target company
13 corporate governance red flags: 🚩
— Mr Family Office (@MrFamilyOffice)
12:45 PM • May 1, 2023

The older I get the more chilled I get

I’m old enough to remember when I had an opinion on everything
— Mr Family Office (@MrFamilyOffice)
9:51 AM • Feb 3, 2024

Apple Vision Pro use case:

It's 2025 and financial modeling is next level
— Mr Family Office (@MrFamilyOffice)
2:02 PM • Feb 6, 2024

📚 what to read

The Magic of Thinking Big by David J Schwartz

First up the caveat.. I always think that the sign of true personal development is that you don’t read personal development books

But this is a classic. It’s an oldie but a goodie. First published in 1959, but the key message is as relevant as ever… your mindset determines your results. If you can overcome self-limiting beliefs, set ambitious goals, and cultivate a positive outlook, you will go far. Even if you don’t read it, keep the title front of mind

📻 what to listen to

The How to Take Over the World podcast by Ben Wilson explores the strategies and tactics employed by historical figures and contemporary leaders to gain power and influence

It explores people from Putin to Disney. Particularly interesting from a family office perspective are the episodes on The Wealthiest Family of All Time - The Rothschilds