Due Diligence and Background Checks on Investors

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September 26, 2024

by a searcher from University of Massachusetts at Lowell in Worcester County, MA, USA

General question on best practices. If your planning on taking on an investor or 2 (or more), what kind of vetting are you doing to make sure the Investors has the funds, and that they are above board? Are people doing background checks on these potential limited partners or does it not matter?

Sam

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Reply by a professional
from Allegheny College in Philadelphia, PA, USA
Hey Sam - This is a good question. I hope others chime in to give additional insights, but this is definitely not an exhaustive list of items to check.

Their track record is always a good place to start. Have they invested in other deals? What are those companies doing today? Do they have a referral you can speak with?

Also consider the amount they are investing vs. their ask. Are they asking for things that are clearly not market terms? If yes, then they may not be a good fit because they don't understand these types of investments.

A background check is also a good thing to do. You want to see if they have any lawsuits pending against other people, or any against themselves. You never want to discover that your investor was sued by two of the last three companies he invested in.

Lastly, one of the best ways to identify a "tire kicker" investor...ask them to sign on the dotted line. Sometimes even a non-binding term sheet will scare them away if they aren't serious. Let me know if you have other questions and I will be happy to assist!
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Reply by a searcher
from Harvard University in Toronto, ON, Canada
Good question. Lot of inexperienced BS are posing as investors in order, to get your PPM, your collaterals, to even learn if the industry is fit for their own acquisition - they are hustlers. Weed them out early by asking relevant question. Stay in control of the meetings and not let them drive meetings. Next is to check track record, and ask relevant references and do diligently check those references. Any first time investors, take opinion of lead investors they may not be ok with these investors. If the raise is big enough engage firms that do background check. Do not skip this if you want to focus on the deal and not on housekeeping, post acquisition
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