What diligence reveals about how a business is run

A diligence request can feel like an interruption to the business of raising capital. Yet the way a company responds can tell a prospective investor a great deal about how that company operates.

Can management reconcile its numbers? Is ownership clearly documented? Can the people negotiating the transaction establish their authority? When answers differ between the presentation and the supporting records, the financing process becomes an examination of those differences.

IFC’s public guidance describes due diligence across business, integrity and other areas. The purpose is assessment, rather than the collection of files for its own sake.

Treat questions as a test of coherence

A strong response links an answer to the right evidence. It also identifies the period covered, the person responsible and any limitation. Sending a large folder without explanation can make a straightforward matter harder to evaluate.

Where a document is missing, the next question is why. An administrative delay and a deeper problem with ownership or commercial arrangements require different responses. Management should avoid smoothing over that distinction.

Improve the business while preparing it

The work can have value even if the particular financing does not proceed. Better records, clearer responsibilities and a more reliable reporting process help future investors and the management team itself.

Preparation should begin before a financier’s list arrives. Establish where important records are held, who maintains them and how changes are approved.

Our view is that a well-prepared company demonstrates respect for both its own story and the investor’s need to test it. Diligence becomes more efficient when evidence is organised around the business decisions it supports.