Due Diligence for Private Business Investment Opportunities

/ 15 May 2018

Due Diligence for Private Business Investment Opportunities

The following outlines the importance placed upon careful, independent Investor analysis of private market investments. “Due diligence” is a process whereby Investors evaluating a potential investment conduct independent analysis and verification of the information presented to them by the Issuer. Due diligence analysis goes beyond simply reading the Offering documents, such as a Private Placement Memorandum (“PPM”) or other Summary Offering Material, it involves questioning further the information presented in the primary Offering documents for a particular Offering. Due diligence is a fundamental part of the investment process.  It should be comprehensive and thorough.  All areas of the business and the individuals managing the business should considered and available for review by Investors.  Issuers and their Broker-Dealer agents should ensure such information is readily available so that the Investor can efficiently make an informed private market investment decision.  Issuers not willing to discuss the details of their business, even when under the protection of a Non-Disclosure Agreement that an Investor may be willing to sign, should be treated with great caution by potential Investors. Areas for analysis include (in no particular order … all are important): industry analysis, product market analysis, production processes, financial analysis (cost analysis, financial history statements, financial projections and Capital structure), personal backgrounds of key managers, a review of potential Liens and legal judgements, intellectual property, past Securities issuance, regulatory compliance, corporate governance, etc. While the emphasis during a due diligence analysis will be, naturally, more heavily weighted to the specifics of the potential investment, areas that may originally seem less significant ultimately can have a significantly detrimental impact on an investment if they are not addressed properly. Federal and state regulations regarding misrepresentation or fraud apply to information provided to Investors in Securities transactions. For more information about conducting due diligence when evaluating a private company investment, see our Due Diligence Checklist.

Seven Key Questions for Evaluating a Private Company

/ 15 May 2018

Seven Key Questions for Evaluating a Private Company

The questions below help Investors to develop a more comprehensive understanding of an Issuer rather than overweigh certain characteristics of the business which, in and of themselves, are not sufficient to justify investment. 1) What is the Product or Service? Product/service characteristics Nature of the product (disruptive technology, better solution, lower cost, etc.) Differentiation Barriers to competition 2) Who is the company? Management (prior business/background, personal motivation, ownership, compensation issues, personal financial condition, “the right stuff?”) Ownership (vis-a-vis key managers, Board involvement, implied valuations) 3) What stage is the Company? Does the company have revenue history, profitability, operating cash flow? 4) Who are the customers? Historical and/or projected Macro issues Aggregate market size Drivers of demand (fear versus greed) Competition Micro issues Target list of near-term customers What drives a given customers decision to buy the company’s product Sales/marketing plan (short-term and longer term, branding) 5) How is the product/service produced? Creating the deliverable Pre-production (talent required, IP, regulatory, site selection, capex required, construction timeline, etc.) Production processes (cost, complexity, vulnerabilities, logistics) Challenges to production/competition Regulatory, “art,” capex, logistical Barriers to entry 6) How does the company make money? Gross margin analysis Pre-tax profitability and cash flow Balance Sheet review (capitalization, use of debt) 7) How will investors be paid back? Equity – what is the future liquidity event (strategic sale, recapitalization, IPO, etc.) Debt – Company’s cash flow generating capacity, etc. Making an investment in a private Company requires significant analysis of the Issuer.  For a brief review of the risks and potential rewards of investing in private companies, please see “Risk versus Return Considerations for Alternative Investments.”