Evaluating Deals and Performing Due Diligence: A Full Checklist
Evaluating Deals and Performing Due Diligence | Family Offices Group
Angel investors, family offices and private investors who make direct investments and want a structured list of what to check before committing capital.
The 5 big lessons
- More hours tied to better returns. The Wiltbank study found investors with more than 20 hours of diligence per deal averaged nearly 6X. Under 20 hours averaged 1.1X. Over 40 hours saw more than 7X.
- Match effort to check size. Some investors do a light review and act on gut for a $10,000 or $25,000 check. A $100,000 investment may justify a deeper review. Strategy matters too, since a vertical investor already knows the industry.
- Judge the team early. Carlos at SeedCamp asks three questions, according to the speaker. Does the team have the needed experience? Can it spot its own weaknesses and hire to fill them? Can it handle the challenges that come with a company's life?
- Stop when red flags pile up. Diligence does not always run to the end. If several red flags appear in the first meeting or the deep dive, an investor can stop once concerns outweigh optimism.
- Verify team, money and legal items. The checklist includes checking resumes and references, tax returns, audited statements, five-year pro formas, the cap table, corporate documents, patents and insurance policies. Each area has its own stated goal.
What you will hear
In the Wiltbank study cited in this talk, angel investors who spent more than 20 hours on due diligence per deal averaged nearly 6X returns. Those who spent less than 20 hours averaged 1.1X. Investors who passed 40 hours saw more than 7X. The talk also defines due diligence as comparing reality with a company's business plan.
Most investors meet the management team for a few hours first, then start a review of 20 to 60 hours. The talk then lists areas to check on direct investments. These cover the team, financial history, projections, financing needs, product, market, competitors, operations, legal documents, intellectual property, property, contracts, insurance and employee matters. Not every item fits every company.
From the source
- The Wiltbank study found investors with more than 20 hours of diligence per deal averaged nearly 6X, versus 1.1X for those under 20 hours.
- Investors who spent more than 40 hours of diligence per deal saw returns greater than 7X in the same study.
- The financial projections review calls for five-year pro formas with cash flow to the next financing round, breakeven timing and a profitability forecast.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Evaluating Deals and Performing Due Diligence | Family Offices Group. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around corporate document review, intellectual property ownership and insurance and contract review. Do not use AI to write your own legal agreements.
Said on the call
"When everything is looking good is the time to be diligent."
"A process for comparing reality with a target company's business plan."
"Due diligence can be boiled down to validating the plan, uncovering the missing pieces and defining the unknown to contain the risk of an investment."
- 1Meet the team for a few hours
- 2Run a 20 to 60 hour review
- 3Check team, financials, legal, IP
- 4Stop if concerns outweigh optimism
Related questions
- How do I close a funding round?I close a funding round by focusing on investors who fit the opportunity and moving each interested prospect through clear, consistent follow-up.
- What documents do investors request during due diligence?Prepare a clear, organized package covering your operations, investments, compensation, team, and track record.
- How do I raise capital for my business?I raise capital by building a repeatable system for attracting the right investors, establishing credibility, and developing relationships before asking for money.
Questions about this video
How many hours of due diligence should an investor spend?
The Wiltbank study found better average returns above 20 hours per deal and higher still above 40 hours. Many investors begin a 20 to 60 hour review after a first meeting with the team.
Does check size change how much diligence is done?
Yes. For some investors a $10,000 or $25,000 check may get only a cursory review. A $100,000 investment may justify a deeper review.
When can an investor stop due diligence early?
If several red flags show up in the first meeting or during the deep dive, an investor can stop once concerns begin to outweigh optimism.
Put this into practice with the data room checklist. See all due diligence resources.
