Investment, Due Diligence, Funding, Finance, Capital, Term Sheets, Business Plan, Shareholders Agreement, Articles of Association, Financial Statement, Company law.
More than ever before, companies need funds for business scale, hence these companies seek investors to provide funding to enable the businesses to achieve financial objectives. Investors therefore, need to ensure all critical documents are in place before committing capital. This is because a wise investment requires more than capital.
Indeed, the allure of an opportunity can be blinding. However, considering that every pound counts, the metrics that are used in arriving at a decision to invest or otherwise are fundamental and should be carefully considered. So, let's talk about the golden rule: 'Due Diligence’.
Thorough due diligence has been the unsung hero of smart investments. It's like financial armour against the unknown.
Due diligence involves a lot of things, however, this piece will concentrate on the relevant documents investors should consider before accepting an investing opportunity.
These documents, which should be on every investor’s radar, provide insights into the investment’s viability, risks, and potential rewards. Here are some documents to consider before committing capital.
1. Business Plan:
A well-written business plan outlines the company’s goals, strategies, and projected financials. This document gives an understanding of the company’s vision, target market, competitive landscape, and growth prospects.
Analyzing the business plan helps investors assess the company's alignment with their investment objectives. In addition to understanding the business and its vision, the business plan also shows the issues the business is likely to face and the business model.
With the business plan showing the key milestones of a company and how to achieve the goals, investors identify the ideal business to invest in.
Investors ought to consider checking the experience and commitment of the management team, the product or services, the market position, the potential to double the capital within at least three years, and the exit opportunities. The Business Plan should outline these issues.
Ensure that the business plan shows the management of the company, and if any gaps exist, there should be a plan to fill such gaps.
2. Financial Statements:
A company’s financial statement gives an overview of its income and expenses. Reviewing the audited financial statement, which includes the income statement, balance sheet, cash flow statement, and statement of changes in equity, investors gain insights into the company's financial health.
The balance sheet shows what the company owns and owes and the shareholders’ investment rate. The income statement outlines the company’s revenue and expenses during a given period. It therefore shows the net income for that period. A cash flow statement, on the other hand, shows how a company manages its revenue and can pay its debt, cover its costs, and fund investments.
Investors can assess revenue trends, profitability, liquidity, and debt levels. These numbers help gauge the company's ability to generate consistent returns, meet its financial obligations, and grow at a sustainable rate.
3. Term Sheet:
A term sheet is another document to look out for. It’s a preliminary document that outlines the key terms and conditions of a potential investment in a private equity transaction. It serves as a roadmap for negotiation and provides a clear understanding of the proposed deal between investors and the company seeking capital.
A well-drafted term sheet minimizes misunderstandings, saves time, and sets the groundwork for due diligence.
Investors can assess the potential risks and returns associated with the investment before committing significant resources.
There are certain things to look out for in a term sheet. This includes the investment amount, valuation, ownership percentage, rights, how the funds will be used, the exit strategy, governance, dividend and distribution policies, anti-dilution protection, etc.
Investors should also ensure that the terms align with their interests and provide measures to safeguard an investment. All the terms should be clear and flexible to accommodate changing market conditions and unforeseen circumstances.
Although a term sheet is a critical document, it is not legally binding. However, it could be drafted in such a way that it would be binding. Its purpose is to establish a framework for further negotiations.
4. Shareholders' Agreements:
Shareholders’ agreement can be described as a compass in the world of private equity. This agreement defines the rights, responsibilities, and obligations of shareholders and can impact on the investors' ability to influence company decisions. It covers matters such as voting rights, dividend distribution, and exit strategies.
How does it affect investors in general? Like it is said that clarity is king, this document spells out the ownership stake, decision-making power, and exit strategies.
The agreement outlines scenarios for dispute resolution, reducing potential disputes and ensuring harmony among all stakeholders.
For investments involving ownership stakes, reviewing shareholders' agreements is critical. It’s not a document to neglect.
5. Articles of Association and other facility agreements:
The Articles of association is a critical document that is paramount to investors. It sets out the administrative structure of a company and outlines the decision-making process.
The Articles of association serves as a blueprint for understanding how a company is managed, its governance structure, and the measures in place to protect investors' capital.
This document also regulates the internal affairs of the company including, issue and transfer of shares, meetings, duties and powers of directors, dividends, borrowing powers, voting rights, etc.
Investors should meticulously analyze it to ensure it aligns their investment goals and risk appetite.
This should be scrutinized alongside other critical documents before making an informed decision. Such other documents as facility agreements that contain pending loan and other credit obligations. This will enable the investors to make informed decisions.
Several other vital documents that investors need to consider before committing capital to any investment opportunity exist. It's crucial to dive into the critical details before taking the plunge and making an investment decision.
However, investors should always engage the services of various financial and legal experts through the investment process to avoid any potential risks.