June 7, 2006

Dedicated Due Diligence

Point of purchase displays entices consumers, leading them to make quick, impulse decisions about a product. Entrepreneurs sometimes take a similar approach anxiously rushing investors. Rarely is there a need to feel rushed or pressured.

Due diligence brings potential problems to the surface. Performing effective, thorough due diligence before investing, can prevent losses and may lead to deals that increase the value of your investment portfolio. For the more experienced investors this will serve as a review, but for investors who are new to the scene you may want to take notes.

At this critical point in the investment process ask/investigate the following:

  • Does the team have specific knowledge and experience that make them appropriate for this venture? Can you trust them?
  • Is there a good market opportunity?
  • Does the plan show a detailed understanding of the potential customer?
  • What is the unique offering behind the plan?
  • Does the overall business model make sense?
  • If they exist, how does the company plan to displace firmly established competitors?
  • Have advertising, promotion, distribution channels and strategic sales costs been assessed accurately?
  • Are the capital requirements, growth, and profitability reasonable?
  • Does the plan show attention to detail and form (correct spelling, grammar, and punctuation; good organization)?

In addition, two important question often arise during the due diligence process. First, what is the risk associated with this investment? Second, does the potential for success outweigh these risks? After these questions have been answered you can begin to make a decision about funding a business.

Check out FundingUniversity for details on the documents, assessments and interviews that should be collected/conducted as part of the due diligence process. As a reminder, areas which should be heavily researched include:

  • market, customer, sales
  • product/service offering
  • management team
  • competition
  • financials

Good luck!

The FundingUniverse.com Team

blog comments powered by Disqus