Due diligence is an exam you can prepare for
The due-diligence process terrifies many founders because it feels like an invasive audit of everything they’ve ever done. In reality, it’s a structured review with predictable questions. Companies that prepare in advance pass smoothly. Companies that scramble to find documents during the process lose credibility, delay the close, and sometimes kill the deal entirely.
The data room: your first impression
A well-organised data room signals competence. It should contain: company registration documents, shareholder agreements, cap table, three years of financial statements (audited if possible), current-year management accounts, financial model with projections, material contracts, employment agreements, IP documentation, regulatory filings, and tax returns. Index everything clearly. First impressions matter.
Financial model integrity
Investors will stress-test your model. Every assumption should be documented and defensible. Revenue projections should be built bottom-up from identifiable drivers, not top-down from market size. Cost assumptions should reference contracts or benchmarks. The model should be internally consistent — balance sheet, income statement, and cash flow should all tie. Broken formulas or circular references destroy confidence.
Legal and corporate hygiene
Due diligence will uncover every piece of corporate housekeeping you’ve deferred. Board minutes not filed. Shareholder consents not documented. Option grants not formalised. IP not properly assigned to the company. Fix these before the process starts, not during it.
Employee and HR matters
Investors will review your team structure, compensation, employment contracts, and any pending HR issues. Ensure all contracts are signed and up to date. If you have contractors who should be employees, regularise them now. Employment tribunal risks or classification issues are red flags that can derail a deal.
Tax compliance
Outstanding tax liabilities, unfiled returns, or unresolved HMRC/IRS queries are deal-killers. Ensure your tax affairs are current and clean. If there are grey areas, get professional advice and document your position before due diligence begins. Transparency about known issues is always better than investors discovering them.
The timeline
Ideally, start preparing your data room 3–6 months before you begin investor conversations. This gives you time to address gaps, clean up corporate hygiene, and build a bulletproof financial model. Companies that do this close 50–60% faster than those that don’t.