PE/VC Financial Due Diligence Checklist

In general terms, due diligence is putting an appropriate amount of effort into assessing or confirming the details about something. People perform due diligence in various situations, including when buying a car or a home, for example.

The amount of assessment necessary varies based on the item or issue being considered. When purchasing a car, looking it over and going for a quick test drive may be all you need to do.

If you’re buying a house, it’s appropriate to visit it multiple times, check out similar homes, review the “comps” in the area, and have a professional do a thorough inspection. When there’s a significant amount of money on the line, thorough due diligence is a must.

Why Due Diligence Matters

Not surprisingly, this is essential for investors. By one estimate, those who do at least 20 hours of it see a 500% increase in the likelihood of earning a return.

That’s because most investment opportunities look promising on the surface. If they didn’t, they wouldn’t be offered. In most cases, it’s not until you finish reviewing the high-level information and dig deeper that you encounter issues that may raise concerns.

Consequently, it’s vital to set aside ample time for your due diligence. Rushing through it to meet a deadline is a recipe for disaster.

It’s also crucial to have a checklist. Performing due diligence is a little like casually surfing the internet. There are “rabbit holes” everywhere, making it easy to get lost in all the information and forget to check on key aspects of the investment. But with a clearly defined methodology, you can avoid those traps and stay focused on the job at hand. 

8 Essential Elements

The specific items on the checklist will vary depending on the investment. However, there are eight types of review that investors should conduct:

  1. Financial. Here you’re looking at things like cash flow, assets, debts, and projections.
  2. Workforce. Is the company adequately staffed? What’s being paid to employees in salaries, benefits, etc.?
  3. Intellectual property (IP). IP is a significant asset for some companies. Here you’re reviewing its patents, trademarks, copyrights, and brand in general.
  4. Market and operational. What is the company’s market share? Is there room for growth? Also, what are the company’s primary business risks and opportunities?
  5. Legal. Does the company have any legal liabilities that might affect your investment decision? Are there any licensing agreements or partnerships you should be aware of?
  6. Tax. In this area, you’re reviewing the company’s record on tax compliance and evaluating its tax returns.
  7. Regulatory. If the company is in a highly regulated industry, this type of due diligence is very important.
  8. Technological. What’s the status of the company’s IT infrastructure, cybersecurity, etc.?

Accelerating Your Due Diligence Checklist With the Right Platform 

Your due diligence checklist is the “roadmap” you follow to reach your decision about an investment. However, having a purpose-built solution for everything from organizing and sharing information to tracking interactions with stakeholders can make the process much more efficient and effective.

Altvia has three layers—data management and automation, intelligence, and secure engagement—that enable rapid, well-informed decisions. When leveraged in tandem with a detailed checklist, it gives users a significant competitive edge.

Contact us today to request a demo.