A potential investor may want to do some due-diligence on your business before they commit to investing – to kick the tyres a bit and see what falls flat. Depending on the investment size they’re making and the importance of the investment to them, their due-diligence may range from just reading the business material you’ve created, to asking a few questions to a full scale due-diligence pack, with a forensic examination of your claims. So whatever information you share in your plan or in the financials, you’ll need to be able to justify all of it – particularly the future projections you make.
Crucially, this doesn’t mean your future projections will turn out to be accurate – none ever are – but what’s more important is that the assumptions on which you predict future performance are believable. If your business plan is based on an assumption that you’ll have 50% market share in Year 1, you’re not going to get through due diligence. So you need to be able to justify the claims you make.
A full due diligence pack may contain the following: financial, tax, commercial, cultural, technical, operational and legal information. I've also known potential new investors who want to know about your current shareholders. Everyone will want to see the cap table.
Then when you read your Shareholders’ Agreement it will probably contain warranties. A warranty is a guarantee, and in the context of investment, it means your investor is expecting you’ve done the legwork to check the claims you’ve made. Your investor doesn’t need to check the claims herself. You’ll be warrantying that the facts you’ve offered are correct and you stand behind all of them. If they turn out not to be, and the impact on the business is significant, the investor may have legal recourse against you, which can get a bit awkward.
It's the same as when you buy insurance for your car or house - you answer the questions your insurer has. They do the minimum check your answers at the time of writing the policy, trusting that your answers are accurate - it's only when you have an accident and they find out you've lied about something to get a cheaper quote, that you get into trouble and risk them not paying out.
When I’ve done crowd-funding raises, the crowd-funding platform has insisted that I justify and reference every claim I’ve made in the business plan, so that the foundations on which I build my plan are solid. Each reference is listed so it can be crosschecked. I think that’s good practice and would encourage you to do the same in your own plan. Make a note of the evidence you've offered. Don't exaggerate. And if you find out later that you have inadvertently made a false claim, you'll need to fess-up to your shareholders and let them know what happened and why.
It’s rare for an investor to make a claim against the warranties you’ve provided, but it can happen and it can be unsettling (sometimes highly damaging) for you and the business. Make sure you fact-check every claim you make so you fly through due-diligence and can sign off the warranties without crossing your fingers.
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