The degree to which potential investors scrutinize a company's finances depends greatly on factors such as the company's industry, the potential investor's due diligence process, and the size of the investment. However, more often than not, investors will dig deep to understand the company's financial health, revenue streams, cost structures, growth rates, and more.
10 Financial Areas That Go Under An Investor Microscope
Up-to-date Financial Statements: The most basic requirement is having recent and historical financial statements ready. This includes the balance sheet, income statement, and cash flow statement.
Forecasted Financials: Investors also want to see your projections for the future. This should include revenue, expense, and profitability forecasts, preferably for the next three to five years.
Audit Your Financials: An external audit adds credibility to your financial statements. It reassures potential investors that the financial position presented is free from material misstatements.
Clear Revenue and Expense Breakdown: Investors want to understand your revenue streams and major expenses. Clear categorization helps to show where money is coming from and where it is going.
Organize All Tax Returns: All past tax returns should be available for review. These documents provide a historical record of your company's financial performance and its compliance with tax laws.
Due Diligence Documentation: Keep other relevant financial documentation on hand, such as contracts with major clients or vendors, loan agreements, lease agreements, etc.
Detail Major Capital Expenditures: Investors may want to understand your company's investment strategy and how it allocates resources for major capital expenditures.
Identify Key Performance Indicators (KPIs): Be ready to present the metrics you use to track your business’s performance. This could include customer acquisition costs, lifetime value of a customer, churn rates, gross margins, etc.
Explain your Valuation: Prepare a rationale for your company's valuation. This could be based on a multiple of earnings, discounted cash flows, or a comparison to similar businesses.
Address Potential Red Flags: Finally, be prepared to address any potential financial issues, such as declining revenues, significant debts, or past financial missteps. It's better to be upfront and honest about these issues rather than having investors discover them independently.
Keep in mind that different investors may have different priorities and concerns, so it's essential to tailor your preparation to your target audience. Also, consider seeking advice from financial advisors or others who have experience with investor due diligence to ensure you're fully prepared.
