When you reach the point where potential investors are showing serious interest, you’ll face due diligence - a thorough inspection of every part of your business, and often focusing heavily on initial Financial Due Diligence. This process is about verifying the accuracy of your claims, confirming the company’s position, and identifying any risks that could affect its valuation. Simply put, this is where your business is put under a microscope.
The Red Flags Investors Don’t Want to See
A wide range of issues can arise during due diligence, each of which can affect how investors perceive the business. Individually, some might seem small, but together they can significantly lower confidence and even jeopardise the deal.
Here are some of the most common pitfalls in Financial Due Diligence:
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Inaccurate or Missing Financial Reporting: Investors want to be able to easily understand your financial accounts, with uniformity of reporting over time, and clear indicators across Cash, P&L, and Balance Sheets. Lack of clear 3-5 year plans, budgets and forecasting will lead to uncertainty over how to measure and assess your business success.
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Missed Filing Deadlines: Missing tax or financial filing deadlines may seem like an admin hiccup, but to investors, it can indicate larger issues with how the business is managed. Consistent delays raise concerns about how effectively the company is run and whether it takes compliance seriously.
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Risky Clauses in Client Contracts: Client contracts are scrutinised heavily. If key agreements include ‘termination for convenience’ clauses, for example, investors might see this as a potential risk—especially if your largest clients could walk away at any moment without notice. Such clauses alter the risk profile of the business and can make your revenue streams look less secure.
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Unclear Ownership and Governance: A missing share transfer certificate or any ambiguity around ownership can open a host of legal questions. Investors need assurance that ownership is clear and uncontested. If there’s doubt, it casts a shadow over your business’s future governance and operations.
Get Ahead of the Curve
The truth is due diligence isn’t just about preparing for when investors come knocking; it’s about staying prepared from the start. Too many businesses scramble to get their house in order only when they start the fundraising process. But the reality is, your day-to-day actions—how you document decisions, how you handle compliance, and how you structure contracts—should always consider what investors will one day be looking for.
You’ll eventually receive an information request and checklist from the investors’ advisers. Imagine how much smoother the process would be if you’d had that checklist in hand when you first incorporated the company. Staying on top of everything from day one—filing deadlines, governance records, client contracts—ensures you’ll face due diligence with confidence, not panic.
The Real Impact of Being Prepared
What’s often overlooked is how much a well-prepared business can enhance an investor’s view. A business that is ready for due diligence signals to investors that it’s well-run, organised, and dependable. It reduces friction in the process and instills a sense of confidence that can positively impact valuation.
At Excelerator Partners, we’ve seen first-hand how avoiding these pitfalls can make all the difference. By working with businesses to build strong financial and operational foundations from the outset, we ensure they’re not just ready for due diligence—they’re ready to impress.
About the author:
Mark Widnall, Fractional CFO
Having qualified as an Accountant with EY, Mark has focused his career on supporting start-up and high growth scaling businesses. He has built an inter-connected skillset encompassing financial management, investments and exits, risk and regulatory, FP&A, and systems management that has enabled him to hold a variety of roles from CFO to Operations Director and Managing Director.
