4 Ways to Defuse the Due Diligence Time Bomb

July 1, 2012

12:00 pm

A dark and insidious being is growing stronger and stronger in your office while you are out conducting business. Customer contracts, leases, organizational documents, employee reviews, invoices, notices from the government – all of this paper will coalesce at some point with the goal of ruining you.

Imagine that you’re about to close on an office lease, or strike a deal with another company to form a joint venture, or finally land that VC capital you’ve been seeking. Before any of that can be finalized, you’re going to get a list (like this) of documents that you need to provide.

If you can’t come up with the documents, or if you can only come up with a portion of them, or if what you come up with is terribly disorganized, then the result could be as drastic as the deal tanking entirely.

Here are some ways to keep your business on top of this situation before it gets out of hand:

  1. Recruit Your Professional Service Providers. Chances are that the more important documents requested in a due diligence review will have been prepared by your CPA, attorney, or banker. Recruit these folks to help you keep these documents organized by preparing a “deal book” each time a separate transaction or tax filing is completed.
  2. Prioritize Your Record Keeping. Ideally, your business will have a wonderful organizational system for everything. That being much easier said than done, you should try your best to keep red flag items (documents that entail so much risk they could blow a deal on their own) organized. This would include tax returns, employment disputes, ownership disputes, and intellectual property ownership records.
  3. Take Notes. You might need to go beyond providing documents to being able to describe how a transaction or situation actually went down. The next time you enter into a contract or deal with more than a few components, write up a narrative that would make it clear to a third party what happened and why.
  4. Reduce Your Business to Writing. Before you can organize your paper, you have to have paper. Without paper evidencing that your business is real, your deal will probably die before the due diligence request is sent. Reduce ownership agreements and capitalization to writing. Get your top employees to sign employment agreements. Use customer agreements as well. Get your taxes filed on time and have your CPA prepare financial statements each year.

If you utilize these tips, your due diligence production might not resemble Dante’s 7th circle of hell.   

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Clint Costa is an attorney and CPA with the Chicago law firm of Harrison & Held, LLP, working with startups, entrepreneurs, and privately held companies on all manner of official-sounding legal and tax matters. Reach Clint at [email protected] or (312) 803-7104.

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