Evaluating Deals and Performing Due Diligence | Family Offices Group

TL;DR

Due diligence is an essential process for investors to assess the desirability and potential of an investment opportunity, and the amount of time invested in due diligence directly correlates with investment returns.

Transcript

Evaluating Deals and Performing Due Diligence What is Due Diligence? Noted angel investor and educator Bill Payne defines due diligence as “a process for comparing reality with a target company’s business plan.” Investor Swathy Prithivi describes it this way, “Due diligence can be boiled down to validating the plan, uncovering the missing pieces an... Read More

Key Insights

• 🥺 Spending more time on due diligence leads to higher investment returns.
• ⌛ Investors with larger investments tend to dedicate more time and effort to due diligence.
• 😤 Meeting with the management team before conducting due diligence can provide valuable insights.
• 😤 Due diligence should cover various areas, including the management team, financial history, projections, market opportunity, competitive landscape, and legal documents.
• ❓ Intellectual property, employee matters, insurance coverage, and other property should also be assessed during due diligence.
• ❓ Due diligence is a dynamic process, and additional areas or issues may arise during the evaluation.

Questions & Answers

Q: What is due diligence?

Due diligence is a comprehensive process undertaken by potential investors to assess the value, desirability, and potential of an investment opportunity. It involves validating the company's business plan and uncovering any missing pieces or unknowns.

Q: How much time should be spent on due diligence?

The landmark Wiltbank study found that investors who spent more than 20 hours on due diligence saw higher returns on their investments. Those who spent less time had lower returns. However, the amount of time spent can vary based on the size of the investment and the investor's strategy.

Q: What factors should be considered when evaluating the management team?

It is important to assess the backgrounds, experience, and references of the management team. Investors should consider if the team has the necessary expertise and insight to execute their plans and handle challenges that may arise.

Q: What areas should be included in financial due diligence?

Financial due diligence includes reviewing and analyzing the company's financial history, statements, projections, and financing needs. This includes assessing tax returns, audits, income statements, cash flow statements, and receivables analysis.

Summary & Key Takeaways

• Due diligence is the process of comparing a target company's business plan with reality and validating its potential.

• Investors who spend more than 20 hours on due diligence see higher returns on their investments compared to those who spend less time.

• The level of due diligence can vary based on the size of the investment, investment strategy, and initial meetings with the management team.