4 Steps to Prepare for Due Diligence

Well, the verdict is almost unanimous: due diligence isn’t fun (although we did manage to find one social entrepreneur who actually enjoyed it). Despite not being the most exciting part of running a charity or social enterprise, due diligence is crucial for getting investment.

If you’ve just started thinking about social investment, or it’s something you could consider in the future, read more for an introduction to the due diligence process and four simple steps to help you prepare.

What is 'due diligence'?

Due diligence is the investigation into your organisation that both you and a potential investor would do before entering into an investment. By carrying out due diligence, you'll all get a better knowledge of your organisation.

An investigation or audit of a potential investment to confirm all material facts, such as reviewing all financial records plus anything else deemed material to the investment

- Investopedia

Due diligence is a process used to:

Gain a stronger understanding of the investment and the organisation
Test and understand the organisation to mitigate any risk
Check the organisation’s business plan to check robustness
Begin the collaborative process between you and an investor to help you understand how to better run your organisation.

Most don't report due diligence as fun. But it does make your business better for going through the process (even if you don’t get the investment).

What does due diligence involve?

Well, this is different for every investor but, it’ll usually involve the following:

Meeting you for an interview and/or site visit
Meeting your board/governance
Reviewing your key documents including business and financial model amongst other things.

Here are four steps to prepare you for the due diligence process:

1 Be honest

Get used to having honest conversations. Be honest with yourself and pick out the high-risk areas before you start. If you’re conscious of any risk at the start you can begin with constructive conversations. Every business has the potential for risk, so it’s not something to shy away from.

Investors want to work with you to support you, and they value knowing about your blind-spots and challenges. To have a strong relationship with any investor it's important that you're honest from the start.

2 Record & store information from the start

You’ll be expected to share a lot with the investor at this stage, from tax to legal matters. So you need to record important information about your organisation as early as possible. And make sure you record it in the right way.

The main areas social investors will likely check are your social impact, the benefit of the investment, the financial and social risks of the investment, and the organisation’s wider business plan.

Cherie Wilson, founder of Think for The Future, suggests you should:

Have a spreadsheet that can map out the minimum next 2-3 years, even if it’s quite basic

Side note: Cherie's the only person who's ever told us she enjoyed the due diligence process. So learn from Cherie to make it more fun!

3 Ask questions

Every organisation carries out due diligence differently, so make sure you check with them how long it’s likely to take and what they want from you. Don’t be afraid to ask for clarity or to challenge what is needed and why, so you are confident that providing more detail is going to be of value both to you and the investor.

4 Consider it as an opportunity to find the best match

It’s a great opportunity to find valuable space to reflect on where you are, the risks and value of your organisation. Due diligence isn’t necessarily fun, so it’s important to see it as a way to benefit you! It’s a really useful opportunity to decide if you and your investor are the best match.

Due diligence is a really valuable organisational process for everybody involved. It enables you to get under the hood of your organisation and activities. You’ll be able to step back to consider your processes in a new light and better understand your organisation.

Let us know, have you started the due diligence process or been through it before? What do you wish you knew before?