Why preparing early for due diligence can help you demonstrate added-value to the business

When you’re the first in-house legal appointment in a scale-up or growth business it can be challenging to gain buy-in to change, particularly when you want investment in technology or more internal or external resource. However, another way to approach your goals is by demonstrating that you are adding value to the business by viewing the changes through the lens of due diligence. Adjusting the narrative from “legal says we need to do this” to “the business is a more attractive investment if we do this” could help drive engagement and support.

We set out below the key ways that counsel involved in high-growth companies can use our exit guide for due diligence to support the changes they want to implement. At the same time it can help you prepare the business for the investigations into the company’s affairs that will arise during the legal process of obtaining investment.

Why early action is important

Persuading the C-suite to take action early, when the next investment round or potential sale may be some way off may be a difficult sell, particularly if you are seeking to implement changes to business processes or introducing additional compliance tasks. However, the due diligence aspect of the legal work involved in obtaining an investment can often end up being the most time-consuming part of the process. Any investor is likely to want to dig into every aspect of the business, to ensure that they have an understanding of the full history of the company and how it operates, and that there are no skeletons in the closet.

Trying to pull all of this together simultaneously, whilst also trying to keep up with the day-to-day running of the legal function and deal with other aspects of the investment process can often feel difficult. It can be invaluable to pre-empt the questions you will receive and start collating as many details and documents as you can. In that way they are readily available when the business is asked for them. This is where early action can help support the dual goals of changing business processes and supporting the eventual investment or sale.

The sooner that all key management personnel are on board with starting this process and provide any input they can on the areas of the business they are familiar with, the easier it is likely to be. This will result in a shorter timeframe from starting the process to receiving the investment or the sale, which in turn may also reduce the associated legal fees. More importantly, a business which can demonstrate it is a well-oiled machine is likely to be a more attractive investment option and potentially more valuable.

 Proactive steps you can take

The headings we have set out in our guide will largely mirror the key areas of the business (such as the employees, contracts and details of its shareholders) that an investor will want to find out about. Working through our guide can help to give you a high level agenda of which aspects to focus on.

The example questions we have provided can also help you to persuade the areas of the business that may need some attention that changes need to be made before formally starting the fundraising process.

For example, when the due diligence process gets underway, we often see customer and supplier contracts that are unsigned provided in response to the due diligence questionnaire. The company is unable to locate signed copies, and this is something an investor is likely to want to see rectified (as well as being a general risk to the business). Finding out in good time that the business does not hold signed copies of a key supplier contract, for example, means that you have the opportunity to reach out to the supplier in question and ensure that a signed copy is put in place. It may also be an opportunity to seek support for investment in technology which can make the process easier, such as a repository for managing and storing your key contracts.

In addition, you may find that it is an opportunity to make any changes to the running of the company that may otherwise be a cause for concern for any investor. For example, it may be the right time to update the company’s terms and conditions and contracting processes or ensure that all necessary risk and compliance policies that the company are required to have are in place and actually followed.

Demonstrating your value to the business

It can often be difficult to demonstrate tangible value that the legal team can add to the business. The work that you do mitigates risks and keeps the business out of trouble but often goes on behind the scenes unnoticed. Being able to show that you are standing the business in good stead for a smoother, less stressful due diligence process and gaining access to investment sooner than otherwise might be the case can be a beneficial tool to use.

The next steps toward a smoother investment process

As we have set out above, any work that you can do before commencing the legal due diligence process when obtaining investment, will put you in good stead for the rest of the deal timeline. Getting the management team on board with this at an early stage will help the process to run smoother and is likely to save the company time and money in the process.

We would be delighted to offer a free consultation to discuss the legal due diligence process and exit strategies in more detail.