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DUE DILIGENCE

Preparing a Business for Institutional Due Diligence

Institutional investors rarely rely only on a pitch deck or management presentation. Before committing capital, they typically seek to validate financial performance, commercial assumptions, ownership, documentation, governance and the information supporting the investment case.

TEREX VENTURES TRANSACTION DUE DILIGENCE
EXECUTIVE SUMMARY

Due diligence is designed to test whether the information presented during an investment or transaction process is supported by the underlying business records.

Companies that prepare early can reduce information gaps, identify potential transaction issues before investors do and respond to diligence requests with greater consistency and speed.

Due Diligence Is More Than Document Collection

Many businesses begin preparing for diligence only after an investor sends a detailed information request. By that stage, management may already be operating under transaction timelines.

A better approach is to treat diligence readiness as part of the broader capital or transaction-preparation process.

The objective is not simply to upload documents into a data room. Management should understand whether the information is complete, internally consistent and capable of supporting the claims made to prospective investors or transaction counterparties.

01

Organise the Corporate and Ownership Record

Institutional investors typically want clarity regarding who owns the business, how ownership has evolved and whether the corporate records support the current capital structure.

Companies should have organised records covering:

  • Certificate of incorporation and constitutional documents
  • Current shareholding structure
  • Historical share issuances and transfers
  • Founder and promoter ownership
  • Investor holdings and shareholder agreements
  • Employee option or incentive structures, where applicable
  • Subsidiary and group-company information
  • Material related-party relationships
Ownership information should be clear, current and consistent across corporate records, management materials and the proposed transaction structure.
02

Reconcile Historical Financial Information

Financial diligence often starts by understanding how the business has actually performed over time.

Investors may compare audited statements, management accounts, tax records, banking information and internal reporting to understand the quality and consistency of financial information.

Management should be prepared with:

  • Historical audited financial statements
  • Recent management accounts
  • Revenue and customer analysis
  • Gross margin and profitability analysis
  • Working-capital information
  • Cash-flow history
  • Debt and other financial obligations
  • Capital expenditure history
  • Tax and statutory financial information

Any significant difference between different sets of financial information should be understood and capable of being explained.

03

Validate Revenue Quality

Revenue growth may attract investor interest, but diligence typically examines the composition and sustainability of that revenue.

Management should understand whether growth is concentrated among a small number of customers, dependent on one-time transactions or supported by repeatable commercial relationships.

Relevant analysis may include:

  • Revenue by customer
  • Revenue by product or service
  • Customer concentration
  • Recurring versus non-recurring revenue
  • Contract duration and renewal profile
  • Customer retention and churn
  • Receivables and collection patterns
  • Revenue recognition practices
04

Test the Financial Forecast

Investors will often compare the company's future projections with historical performance and current operating capacity.

Forecasts should therefore be connected to identifiable commercial and operational assumptions rather than relying only on top-down growth percentages.

Area
Typical Diligence Question
Revenue
What operational assumptions support future growth?
Margins
Why should margins improve, decline or remain stable?
Working Capital
How much cash is required to support forecast growth?
Capex
What investment is required to deliver the business plan?
Funding
When does the company require additional capital?
05

Prepare Commercial Evidence

Commercial diligence evaluates whether the market opportunity and competitive positioning presented by management are supported by available evidence.

Companies should be prepared to support:

  • Market size and growth assumptions
  • Customer demand
  • Pricing strategy
  • Competitive positioning
  • Sales pipeline
  • Distribution channels
  • Supplier dependencies
  • Geographic expansion assumptions
  • Key operating dependencies

The objective is to distinguish between management expectations and evidence already demonstrated through actual commercial performance.

06

Review Material Contracts and Documentation

Material business relationships should be supported by appropriate documentation wherever possible.

Depending on the company and transaction, investors and their advisers may review contracts with customers, suppliers, employees, lenders and strategic partners.

Common areas include:

  • Material customer contracts
  • Supplier agreements
  • Distribution or channel agreements
  • Loan and financing documentation
  • Founder and senior-management agreements
  • Employment documentation
  • Intellectual-property documentation
  • Lease or property agreements
  • Strategic partnership agreements
Important:

Formal legal opinions and jurisdiction-specific legal conclusions should be provided by appropriately qualified legal counsel. Transaction advisers can help identify documentation gaps and coordinate the diligence process.

07

Identify Regulatory and Compliance Requirements

Investors may seek confirmation that the company has obtained the licences, approvals and registrations relevant to its business.

The diligence scope will depend heavily on sector and jurisdiction, but management should be able to identify the principal regulatory requirements affecting the business.

Areas may include:

  • Operating licences
  • Sector-specific approvals
  • Tax and statutory registrations
  • Employment compliance
  • Data and privacy requirements
  • Environmental or operational permits
  • Import/export permissions where applicable
  • Pending regulatory matters
08

Prepare Founder and Management Information

Institutional investment is also an assessment of the people who control and operate the business.

Investors may therefore seek greater clarity around founder background, professional history, ownership, decision-making authority and key-person dependency.

Background Professional experience and track record
Ownership Promoter holdings and beneficial interests
Governance Management roles and decision authority
Dependency Reliance on individual founders or key executives
09

Build a Structured Data Room

A data room should make diligence easier, not create additional confusion.

Documents should be grouped logically, named consistently and kept current throughout the transaction process.

A simple structure may include:

  • Corporate
  • Financial
  • Commercial
  • Customers
  • Legal documentation
  • Employment and management
  • Intellectual property
  • Tax and compliance
  • Financing
  • Other material information
10

Identify Issues Before the Investor Does

The objective of readiness is not to suggest that a business has no risks or weaknesses.

Every business has areas that may require explanation. The important issue is whether management understands those areas and can address them transparently.

Management is generally better positioned when it identifies and explains material issues proactively rather than allowing investors to discover them unexpectedly during diligence.
DUE DILIGENCE READINESS CHECKLIST

Before Opening the Data Room, Ask:

Is our current ownership structure clearly documented?

Do our financial records reconcile across different sources?

Can we explain customer concentration and revenue quality?

Are forecast assumptions supported by business drivers?

Are our major customer and supplier relationships documented?

Are relevant licences and registrations available?

Are founder and management roles clearly documented?

Have we identified material legal or financial issues?

Is the data room logically structured?

Can management explain important diligence findings consistently?

Common Issues That Can Slow Institutional Diligence

Certain issues frequently create additional questions or delays during a transaction.

01

Financial information that differs across documents.

02

An unclear or outdated shareholding structure.

03

Revenue claims that cannot be reconciled with financial records.

04

Material customer or supplier arrangements without documentation.

05

Unsupported market-size or growth assumptions.

06

Missing licences, approvals or corporate documentation.

07

Material disputes or liabilities disclosed late in the process.

08

A disorganised data room with incomplete information.

TEREX PERSPECTIVE

Diligence Readiness Is About Reducing Transaction Uncertainty

Institutional diligence should not be viewed only as an investor exercise conducted after a term sheet or serious expression of interest.

For management teams, the preparation process can also reveal financial, commercial and documentation gaps that may affect valuation, negotiation or transaction execution.

Addressing those issues early can create a more disciplined transaction process and give decision-makers a clearer view of the business before negotiations progress.

TRANSACTION DUE DILIGENCE

Preparing Your Business for Institutional Scrutiny?

Speak with Terex Ventures about due diligence readiness, financial analysis, information-gap identification and transaction preparation.

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