What to know about my contracts before investor due diligence?

Investor due diligence is a painful but incredibly important phase in securing investments for your business. As you prepare for this process, one aspect that requires going through with a fine toothed comb is your contracts. Contracts serve as the legal basis of your income and of your business dealings, outlining rights, responsibilities, and obligations. At the end of the day they are what props your business up and gives your income validity. Understanding what you need to know about your contracts before investor due diligence can significantly impact the outcome of the investment. Let’s jump into this before it gives you a jump scare in your conversations with your potential investors.

Understanding the Importance of Contracts

Contracts are legally binding agreements that govern relationships between parties, this could be your employees, contractors and of course, your customers. In the context of investor due diligence, contracts provide insight into the operational and financial health of a business. Investors will make sure that they have a deep dive into your contracts to assess the risks and opportunities associated with an investment. Therefore, having well-drafted and comprehensive contracts is important. If you can get to the point that you have an overview of what you’ve agreed to in terms of key issues like liability then you’ll be well set up for success.

Types of Contracts

Contracts come in a whole lot of forms, ranging from employment agreements to sales contracts and lease agreements. Each type serves a specific purpose within the business ecosystem. Understanding the in’s and out’s of different contracts is essential for effectively managing risk and ensuring compliance.

Key Components of Contracts

No matter of the type, all contracts contain key components, including parties involved, terms and conditions, payment terms, termination clauses, and dispute resolution mechanisms. These elements form the foundation of the contractual relationship and should be clearly outlined in the contract to avoid ambiguity.

1) Reviewing Existing Contracts

Before undergoing investor due diligence, you should make sure that you conduct a thorough review of existing contracts. This review helps identify any potential issues or discrepancies that may arise during the due diligence process. Pay close attention to contractual obligations, expiration dates, and any clauses that could pose a risk to the investment. If possible pull this out into a deal desk tracking spreadsheet. This can be done by Contract Sent, as a service for you, or with the help of a junior legal person. Keep in mind that the investor will likely have a legal team whose job it is to dig deep into these things and create a similar spreadsheet. Your internal copy will be for your reference to be informed about your customers.

2) Identifying Potential Issues

Common issues found within contracts include vague language, conflicting terms, undisclosed liabilities or high levels of liability. Addressing these issues proactively at renewal of contracts can mitigate potential risks and instill confidence in investors. Even having a legal strategy to renegotiate risky contracts can provide your potential investors with confidence that you are working to de-risk the business. Consider engaging legal experts to conduct a comprehensive review and address any concerns.

3) Legal Compliance

Contracts must comply with applicable laws and regulations to be enforceable. Ensure that your contracts adhere to legal standards governing your industry and jurisdiction. Non-compliance can lead to legal disputes and tarnish your reputation in the eyes of investors.

4) Mitigating Risks

Risk mitigation is an essential aspect of contract management. Implementing strategies such as insurance coverage, indemnification clauses, and limitation of liability provisions can help protect your business interests and reassure investors.

5) Negotiation and Renegotiation

During investor due diligence, be prepared to negotiate or renegotiate contracts to align with investor expectations. Open communication and flexibility are key to reaching mutually beneficial agreements that satisfy both parties.

6) Documenting Changes

Any modifications made to contracts should be properly documented and communicated to all relevant parties. This ensures transparency and reduces the likelihood of disputes arising in the future.

7) Communication with Investors

Effective communication with investors regarding contract-related matters is vital for maintaining trust and transparency. Keep investors informed about any significant changes or developments that may impact the investment decision.

8) Seeking Legal Advice

Engage legal professionals with expertise in contract law to guide you through the due diligence process. Their insights can help identify potential pitfalls and ensure that your contracts are legally sound. A second pair of eyes here can never hurt either.

9) Ensuring Transparency

Transparency is paramount throughout the due diligence process. Disclose all relevant information regarding contracts to investors, including any potential risks or liabilities. Honesty and openness foster trust and credibility.

10) Finalizing Contracts

Once due diligence is complete, finalize contracts promptly to expedite the investment process. Ensure that all terms and conditions are clearly documented and agreed upon by all parties involved.

Before undergoing investor due diligence, you should know about your contracts. If you don’t it will be reflected poorly on you and your understanding of your business as a investment vehicle. Thorough preparation and understanding of your contracts serve as essential prerequisites for this process. By addressing potential issues, ensuring legal compliance, and maintaining transparency, you can significantly enhance investor confidence and pave the way for successful investment outcomes.

FAQ’s