What is Due Diligence

Noreen Hynes
Sep 1, 2022
3 min read

Updated: 3 days ago

By Noreen Hynes. B.COMM, FCA

What you need to know about the due diligence process if you are a Start-up entrepreneur.

Investors may request that due diligence be conducted on a company before investing their money. Due diligence typically won't be a major undertaking for small start-up businesses such as coffee shops, restaurants, or smaller service companies. Irrespective of this, you may like to know what is involved in a due diligence review.

Entrepreneurs who set up businesses that can snowball and go global should understand the due diligence process. When the company is in high-growth mode, it would be helpful to have a permanent due diligence file open and maintained to make it easier to go to market for funds when required. The level of due diligence will depend on the investor involved; for example, an institutional investor may require much more intense due diligence than a single private investor. Due diligence allows a significant investor to access the company records.

· Due Diligence records include books of account, legal agreements, shareholder agreements, employment contracts for senior people, board minutes, company secretarial records, leases, title deeds to buildings, patents & trademarks, banking agreements, large customer agreements, and significant supplier agreements. They may also request to talk to the larger customers and suppliers of the company. Some investors spend more time talking to management than doing desktop due diligence. It depends on the investor and what they regard as most important.

· What due diligence involves: Due diligence can include checking essential legal documents of the company, including patents, trademarks, copyrights, product licenses for different markets, property ownership or lease documents, loan agreements, pending legal actions against the company, and all disclosures by the directors and company secretary, auditor reports, lists of significant customers and suppliers, biographies of all the top management team and the Board of Directors, minutes of board meetings, analysis of essential items in the balance sheet, insurance cover documents, list of contingent liabilities and any non-compliance matters and possible penalties including for environmental breaches, audited sets of Financial Accounts, management accounts and taxation correspondence with the Revenue Commissioners if applicable.

· Non-disclosure and non-compete agreements: The best thing to do for due diligence and maintain confidentiality is to have the parties concerned sign a non-disclosure and non-compete agreement.

· Give access in a controlled environment: Interested parties can access the data in a controlled data room for a specified period, but with restrictions on copying the data material.

Companies are concerned that investors could be just sniffing around, trying to peek at the company books, rather than being seriously interested in investing, so screen them before giving them access to sensitive company information. Due diligence is all about investors gaining knowledge about the company and assessing the risks. Identifying the risks involved with any new product or business must withstand scrutiny from several parties, such as seed capital investors, future investors, lending institutions, and banks. Risk is difficult to calculate as it takes many forms, and the probability factor of an occurrence is tough to predict. Yet, identifying risks as part of a necessary assessment of possible or likely incidents in a new start-up should be done annually. You can insure most risks, but the costs can be high. The question of what to insure and what not to insure is debatable. Public and employee liability is a must, and product liability insurance would be advisable for a new product. Some companies will only insure against significant existential risks, such as fire, and will carry the cost of other adverse incidents on their books. It is advisable to take professional advice on what to cover, read the underwriter contracts carefully, and agree on definitions. Due diligence for a start-up would be relatively simple, but it can still be required.

Noreen Hynes, B.Comm, FCA, Author, retired Chartered Accountant, Entrepreneur and Author