Due Diligence Explained: What Investors Look for in Your Business. Investor Readiness Begins Long Before the Investment.

Securing investment is not simply about having an innovative product or a compelling business idea. Sophisticated investors invest in businesses that are legally compliant, financially transparent, operationally sound, and capable of delivering sustainable returns. Before committing capital, investors undertake a comprehensive review of the business through a process known as due diligence.

Due diligence is one of the most significant stages of any investment transaction. It enables an investor to identify legal, financial, commercial, operational, regulatory, and tax risks that may affect the value of the investment or the viability of the business. For founders, it is an opportunity to demonstrate that the business has been properly structured and managed.

Many otherwise promising investment opportunities fail not because the business lacks potential, but because fundamental legal and regulatory issues emerge during the due diligence process.

What is Due Diligence?

Due diligence is the systematic investigation and verification of a company’s affairs before an investment, merger, acquisition, or other significant commercial transaction.

Rather than relying solely on a founder’s representations, investors seek documentary evidence to verify that the business is what it claims to be. Every material aspect of the company is scrutinized to determine whether there are hidden liabilities, unresolved disputes, regulatory issues, ownership concerns, or governance deficiencies.

In practical terms, due diligence answers one fundamental question:

“Is this a business worth investing in, and what risks accompany that investment?”

Why Due Diligence Matters

For investors, due diligence serves several critical purposes:

1. Verifies the accuracy of information provided by the company.

1. Identifies legal and financial risks before funds are invested.
2. Determines the fair valuation of the business.
3. Assesses compliance with applicable laws and regulations.
4. Reveals operational weaknesses that may require corrective action.
5. Assists in negotiating investment terms, warranties, indemnities, and conditions precedent.

For founders, a successful due diligence process builds investor confidence, shortens negotiation timelines, and often improves valuation.

 

What Investors Look For

Although every transaction differs, investors generally examine the following areas.

1. Corporate Structure and Corporate Governance

The first question investors ask is whether the company legally exists and has been properly constituted.

Typical documents requested include:

1. Certificate of Incorporation

1. Memorandum and Articles of Association
2. Status Report from the Corporate Affairs Commission (CAC)
3. Register of Members
4. Register of Directors
5. Share Certificates
6. Board and Shareholders’ Resolutions
7. Records of allotment or transfer of shares

Investors want certainty regarding ownership. If there are inconsistencies in the company’s records or uncertainty about who owns the shares, investment discussions may stall immediately. Strong corporate governance also reassures investors that the company has appropriate decision-making structures and internal controls.

2. Shareholding and Capital Structure

One of the most heavily scrutinized areas is the company’s equity structure.

Investors will typically ask:

1. Who owns the company?

1. How many shares have been issued?
2. Are there outstanding options or convertible instruments?
3. Have all share issuances complied with applicable law?
4. Are there shareholder disputes?
5. Are there restrictions on transferring shares?

Unclear ownership is one of the most common reasons investment transactions become delayed. Maintaining an accurate capitalization table and ensuring all corporate records align with filings made at the Corporate Affairs Commission is essential.

3. Regulatory Compliance

Investors seek assurance that the business complies with all applicable laws. Depending on the nature of the business, this may include compliance with:

1. Corporate Affairs Commission (CAC) requirements

1. Federal Inland Revenue Service (FIRS) obligations
2. State Internal Revenue Service obligations
3. Nigeria Data Protection Act requirements
4. Sector-specific licensing requirements
5. Consumer protection regulations
6. Employment laws
7. Immigration requirements (where applicable)

Businesses operating in regulated industries such as financial services, healthcare, telecommunications, fintech, energy, or digital lending are often subjected to enhanced regulatory due diligence. Non-compliance may expose investors to regulatory sanctions, financial penalties, or reputational risk.

4. Contracts and Commercial Relationships

Investors examine the legal relationships that sustain the business.

They commonly review:

1. Customer contracts

1. Supplier agreements
2. Distribution agreements
3. Service Level Agreements (SLAs)
4. Consultancy agreements
5. Partnership agreements
6. Loan agreements
7. Lease agreements
8. Non-Disclosure Agreements
9. Software licensing agreements

The objective is to determine whether key revenue-generating relationships are legally enforceable and whether any contractual obligations could adversely affect the investment. Poorly drafted or unsigned contracts often become significant red flags.

5. Intellectual Property

For many startups and technology companies, intellectual property represents one of their most valuable assets. Investors seek confirmation that the company not an individual founder owns its intellectual property.

This typically includes:

1. Trademarks

1. Copyrights
2. Patents (where applicable)
3. Software ownership
4. Website rights
5. Brand assets
6. Proprietary technology
7. Domain names

Where intellectual property has not been properly assigned to the company, investors may require corrective measures before completing the investment.

6. Employment and Human Resources

A company’s workforce can significantly influence investment decisions.

Investors often request:

1. Employment contracts

1. Staff handbook
2. Confidentiality agreements
3. Non-compete clauses
4. Pension compliance records
5. Payroll records
6. Disciplinary policies
7. Employee benefit arrangements

Businesses without properly documented employment relationships expose themselves to avoidable litigation and financial liability.

7. Financial Records

Although lawyers focus primarily on legal due diligence, financial due diligence remains equally important.

Investors generally review:

1. Audited financial statements

1. Management accounts
2. Bank statements
3. Cash flow reports
4. Revenue history
5. Existing debts
6. Outstanding liabilities
7. Tax filings

The objective is to determine whether the company’s financial position supports its valuation.

8. Litigation and Disputes

Investors need to understand whether the company is involved in disputes that could materially affect its operations.

This includes:

1. Pending litigation

1. Arbitration proceedings
2. Regulatory investigations
3. Customer complaints
4. Employment disputes
5. Intellectual property claims
6. Compliance investigations

Even where litigation exists, investors primarily assess the financial and operational impact rather than assuming the business should be avoided altogether.

9. Data Protection and Cybersecurity

Businesses that collect personal information must demonstrate responsible data governance.

Investors increasingly assess:

1. Data privacy policies

1. Data processing agreements
2. Internal security measures
3. Privacy notices
4. Incident response procedures
5. Regulatory compliance

Weak data governance exposes businesses to regulatory action and reputational damage.

10. Tax Compliance

Outstanding tax liabilities can significantly reduce a company’s attractiveness to investors.

Common areas reviewed include:

1. Company Income Tax

1. Value Added Tax (VAT)
2. Withholding Tax
3. PAYE obligations
4. Pension remittances
5. Development Levy
6. Relevant tax clearance records

Undisclosed tax exposure may materially affect the structure or valuation of an investment.

Common Red Flags That Concern Investors

Experienced investors become cautious when they encounter issues such as:

1. Missing corporate records

1. Unregistered share transfers
2. Incomplete statutory registers
3. Absence of written contracts
4. Poor accounting records
5. Outstanding regulatory filings
6. Intellectual property owned personally by founders
7. Unresolved shareholder disputes
8. Regulatory non-compliance
9. Pending litigation that has not been disclosed

Most of these issues can be remedied before an investment process begins, provided they are identified early.

How Businesses Can Prepare for Due Diligence

Investor readiness is not something to be addressed after receiving an investment offer. Businesses should proactively maintain a state of readiness by:

1. Keeping corporate records current and accurate.
2. Filing all statutory returns as they become due.
3. Maintaining properly executed commercial agreements.
4. Regularly reviewing regulatory compliance obligations.
5. Ensuring intellectual property is properly registered or assigned.
6. Keeping employment documentation up to date.
7. Organising legal and corporate documents in a secure data room.
8. Conducting periodic internal legal audits to identify and resolve compliance gaps before investors do.

Thinking of investing or acquiring a business?

Don’t commit before you conduct proper due diligence.

Our team is available to help you identify legal, financial, and regulatory risks before you invest, ensuring that your decisions are informed, protected, and legally sound.

Contact us today to schedule a due diligence consultation and invest with confidence.

Team 618 Bees

 

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