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Business Owners, CFOs

Top Tips for Investor Due Diligence


As a CEO, you can count on undergoing extensive due diligence for a sale or capital raise. You should be prepared to scrutinize your counterparties with equal rigor. Price is important, but so is fit.

During a recent panel at Axial Concord, we asked four experts for their tips on effectively diligencing investors, lenders, or buyers in a deal.

Dig in with questions.

“The best scenario is when CEOs ask as many questions of me as I do of them — and I ask a lot of questions,” says Joe McCurdy, Head of Origination for Guggenheim Partners’ direct lending effort.

A few good inquiries for financial sponsors:

  • Can you tell me about your capital base?
  • What are your motivations?
  • Can you tell me about your average investment periods?
  • Will you still be the right investor for my business in 5 years?
  • How big is your team?
  • Who’s behind you? If an issue comes up, who will I be dealing with?

Ask for references.

“I love when people ask for references, and I tend to offer them up proactively,” says McCurdy. For firms that don’t volunteer references, seek them out. Failing to do so is a huge missed opportunity.

Don’t be afraid to use your network to find additional CEOs who have worked with the capital provider or buyer. As fellow travelers, these are the people best suited to help you decide if a potential partner is a good fit. Ask tough questions (in a decorous way). If you were starting over, would you work with them again and why? How did the investors behave when things got tough? Keep in mind that references’ answers may be different if they are still engaged with the investor vs. all the way exited.

Look for flexibility.

Particularly when it comes to lenders, “research what the organization that you’re choosing offers outside of your current needs,” advises Daniel Walsh, Vice President at BBVA Compass. For example, even if you’re looking for senior debt, consider whether a bank offers services like factoring that could help during a tough stretch. “This way, you could keep a debt facility in the same organization without having to go to a more expensive firm. “In this way, it may be possible to keep a debt facility in the same organization without having to go to a more expensive firm.”

Judge them against your own goals.

Especially in the case of a financial sponsor, finding someone whose vision aligns with yours is crucial. As soon as a sponsor comes on board, “You have to consider the interests of all shareholders equally,” says Mark Taffet, CEO & Founder of MAST Advisors, Inc. and a chair with Vistage International. “You will have to run the company in an institutional manner and you’ll be held to an even higher level of reporting, whether the investor holds 1% or a majority of the company.”

“Make sure before the transaction process that you’re very clear on your own goals — whether it’s growth capital, 100% liquidity, partial liquidity, etc. If you’re unclear about your own goals, it’s going to be very hard to identify and choose the right partner.”

Trust your gut.

“You’re going to spend a lot of time with these people,” says Andrew Cardone, a wealth manager with Merrill Lynch. Before you legally bind yourself to a capital provider or buyer, “Ask yourself: Do you like them? Do you trust them?” Respect is key to a successful transaction.

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