Getting your books ready for investor due diligence

The term sheet is exciting. The due diligence request list that follows is less exciting, especially if your books are a mess. Here’s what to have ready.

What investors typically ask for

• Monthly financial statements (P&L, balance sheet, and ideally cash flow) for the last 12 to 24 months.
• Accrual-basis books. Cash-basis numbers can make revenue look lumpy or misleading.
• A cap table that matches your legal documents.
• Revenue detail: customer list, contracts, and how you recognize revenue, especially for annual or prepaid plans.
• Payroll and contractor records, including proof you’re classifying people correctly.
• Tax returns and compliance: filed federal and state returns, sales tax registrations if applicable, and payroll tax filings.
• Bank statements that tie to your books.

The red flags that slow deals down

• Personal and business expenses mixed together.
• Months that were never reconciled.
• Revenue that doesn’t match what was actually collected.
• Missing 83(b) elections for founder stock.
• Unfiled returns or unpaid payroll taxes.

None of these are necessarily deal-killers. They all cost time, legal fees, and leverage.

How to get ready

1. Clean up now, not during diligence. Catch-up bookkeeping is much less stressful before someone’s waiting on it.
2. Switch to accrual if you haven’t.
3. Close every month so the numbers are always current.
4. Organize a data room with statements, returns, contracts, and your cap table.

The short version

Investors are buying into your numbers as much as your pitch. Clean, monthly, accrual books make diligence boring, which is exactly what you want. If you’re planning to raise in the next six months, now’s the time to get the books in shape.