Ah, the Due Diligence. So needed and yet at times so misunderstood. And what can be misunderstood can be demeaned and griped about. So here we shall simply explain what the Due Diligence process is when a merchant banker is going through the financing process with their client.
Simply put, the Due Diligence process (or any due diligence for that matter) is like a check-up at the doctor’s office or a visit to the dentist. In the financial world it is a credit check for a loan or credit card.
The Due Diligence is a “check-up” of all the aspects of a person’s business model. At its core, it is an examination and verification of the project owner’s representations; nothing more, nothing less.
Understanding a Due Diligence can only lead to better communications and exchanges of information between the invested parties.
Once the client/ project owner understands the Due Diligence process, the best way to go through it is to help the merchant banker or investor-type the dot all the i’s and cross all the t’s. Sometimes it’s a lengthy process, granted. Some people do complain that it can take some time and it won’t get done overnight. But again, the best way to speed up the process is to be as forthcoming and transparent as possible.
Why? Some people will say ‘but I don’t want them to know everything! My life and my work is my own.’ That goes without saying, of course. But when applying for funding, cards have to be on the table and the Due Diligence is there to make sure that everything is just as it should be so that the client can go on to getting what they came here for – the money. It’s not an invasion of privacy – it’s a litmus test.
At the core of all this, the client (or project owner) has a lot more power than they think – the length of the Due Diligence is completely in their hands. All necessary documents provided and accounted for = short Due Diligence. Lots of holes = not so short Due Diligence.
We’ve addressed this next point before but it’s important to talk about this again; there is the belief by some people that they have to hide the weaknesses of their project or hide a weakness in their business. So they lie. And then the litmus test figures out that they’ve lied and then they’re on the defensive and the funder is just confused and looking for answers. This is a really unfortunate event because it can really hamper progress in the funding process – and ultimately, it just doesn’t work. What we suggest to our clients and what we suggest to you, reader, is to own up to the weaknesses right away. Sounds counter-productive, right? But the fact is that the truth will eventually come out (it always does) and then it makes you look bad.
If you talk about the shortcomings in a forthright manner, your funder may simply say ‘oh, we know how to handle this risk and we can help you mitigate it’ or ‘hmm, we see what you’re saying. Ok let’s put our heads together on this and figure it out.’ When the project is good, the funder wants it to go through just as much as you do. So trust in the Due Diligence, trust that you can make this happen, and trust your funder to help you and guide you through the process. This is something that is part of our own corporate culture and it has not stood us wrong yet.
Always make sure that you make an informed decision in all cases,
All the Best,