Start Up Due Diligence: What To Expect

As a startup founder, it is important and in your best interest, to proactively create a Due Diligence Checklist, even though investors are the ones usually performing due diligence.  It’s a valuable tool that not only impresses investors but also makes your journey as a founder smoother and more successful. The due diligence process varies significantly depending on the context and the specific goal. 

Due Diligence Checklist

At HealthCap Africa, we conduct due diligence for investment purposes. Here’s what you can expect from our due diligence:

Document Review:

  • Examination of financial statements, contracts, and legal documents related to the target company or asset.
  • Review of corporate governance documents, organisational structure, and ownership history. 

Financial Analysis:

  • In-depth analysis of the target’s financial statements, including income statements, balance sheets, and cash flow statements.
  • Identification of key financial metrics, such as revenue, profit margins, EBITDA, and working capital.
  • Assessment of historical financial performance and trends.

Legal Due Diligence:

  • Review of contracts, agreements, and legal obligations, such as leases, licenses, and pending litigation.
  • Examination of intellectual property rights, patents, trademarks, and copyrights.
  • Assessment of regulatory compliance and any legal issues that may impact the deal.

Operational Due Diligence:

  • Evaluation of the target company’s operations, including production processes, supply chain, and distribution channels.
  • Assessment of key operational risks and potential areas for improvement.
  • Consideration of technology infrastructure and IT systems.

Market and Industry Analysis:

  • Examination of the target company’s position in the market and industry trends.
  • Competitive analysis and market share assessment.
  • Identification of growth opportunities and market challenges.

Product Analysis 

  • Evaluation of the target company’s product or service portfolio, including a review of product specifications, features, and quality.
  • Assessment of the uniqueness and competitiveness of the products or services in the market.
  • Analysis of product life cycles and potential risks related to product obsolescence.

ESG Due Diligence:

  • Investigation of environmental risks and regulatory compliance.
  • Evaluation of sustainability practices and their impact on the business.

Human Resources and Culture:

  • Assessment of the target company’s workforce, including staffing levels, employee benefits, and labour agreements.
  • Evaluation of company culture, employee retention, and potential HR liabilities.

Intellectual Property and Technology:

  • Review of intellectual property assets, such as patents, trademarks, and copyrights.
  • Analysis of technology assets, proprietary software, and potential technological risks.

Management Team:

  • Evaluation of the capabilities and experience of the existing management team.
  • Consideration of the team’s ability to execute the business plan.

Customer and Supplier Relationships:

  • Assessment of key customer and supplier relationships, including contracts and dependencies.
  • Analysis of customer retention rates and potential revenue risks.

Tax and Financial Compliance:

  • Review of tax filings and compliance with tax regulations.
  • Assessment of potential tax liabilities and strategies for tax optimization.

Risk Assessment:

  • Identification and analysis of key risks associated with the target company or asset.
  • Development of risk mitigation strategies.

It’s important to note that the due diligence process may vary based on the specific nature of the transaction and the industry involved. Additionally, the depth and scope of due diligence can vary, with some processes being more comprehensive than others. The goal of due diligence is to gather the necessary information to make an informed decision and mitigate risks associated with the transaction or investment. It’s often a collaborative effort involving legal, financial, operational, and industry experts.

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