Due Diligence Tips

  1. Why should you prepare for Due Diligence?
    It is important to have all the materials concerning due diligence prepared and organised prior to approaching an investor. This will allow you to keep the focus on the actual funding process and transaction documents, rather than responding defensively to the due diligence process.
  1. What is Due Diligence?
    Due diligence is the process of investigating all aspects of the business and affairs of a company. Due diligence will typically assess legal, financial and operational matters.
    Due diligence will occur before investors proceed with their investment in your company. Legal due diligence will involve reviewing key documents and information. Investors will investigate key legal aspects of your business such as compliance with laws, intellectual property, employment matters, key contracts, and regulatory and litigation matters.
  2. What are some typical examples of questions in a Due Diligence questionnaire?
    An investor will provide a due diligence questionnaire for the company to complete and respond to.
    The questionnaire will be organised according to different categories, and will include a series of questions related to that category.
    This is a sample question that may be asked in relation to key contracts:
    Please describe, and provide copies, of all material agreements with customers in respect of the business?
    Most questions will be framed as an open question intended to elicit information and explanations. Copies of these material agreements will give investors a sense of whether the common terms of business adopted by the business are sufficiently robust and meet market standards.
  3. What are some practical tips for due diligence?
    1. It is never too early to prepare your documents and information that you will need to provide to potential investors for their due diligence. It is better to begin and maintain this collation in pace with the growth of the business. It can be an arduous task to collate documents and information only at the time that due diligence occurs.
    2. Organise soft copies of business documents on databases and ensure to organise the information and documents in a proper order. For example, have all the intellectual property information documents together, all the employment documents together, and have all the financial information together.
    3. Ensure that confidentiality and non-disclosure obligations are in place before starting due diligence. This may be in a binding confidentiality clause in the Term Sheet, or in a separate non-disclosure agreement.
    4. It is important to keep a record of anything that has been disclosed in due diligence to an investor, especially the documents. Often, details of what has been disclosed will be included inside the transaction documents as a disclosure against warranties given by the company.
    5. If something is disclosed orally, make sure that it is written down as a record that has been disclosed to the investor.
    6. Have clear lines of communication. It is very important to have clear processes of who should contact who in respect of due diligence. If many people are responding to one another, it may cause confusion between communication lines and difficulties to keep track of exactly what has been disclosed.
    7. If using a virtual data room, it is very important to make sure that the data room is secure as stored documentation contain confidential information. Widely used data rooms are not advised due to the lack of security. We recommend using professional data room service providers that offer more security and regulation on access and downloads.
    8. Limiting who has access to the data room is also very important. Make sure that only the people who need to have access to the documents have access.

Tara Chan

If you would like to discuss any of the matters raised in this article, please contact:

Pádraig Walsh
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.