How to Conduct Due Diligence on a Business Before Funding It

A sound due diligence process on a business you are looking to fund should move from initial screening to verification, risk assessment, and a funding decision. The exact depth will depend on the size of the funding request, the type of business, its stage, and the level of risk involved. For instance, for investors considering businesses in Nigeria, the process would most of the time mean understanding the company's legal and regulatory position, financial records, ownership structure, and ability to use capital effectively. But the process generally follows these steps.

1. Define What You Need to Make your Decisions

Before requesting documents, determine what you need to know to make the funding decision. Start with the funding request itself. How much capital is the business seeking? What will it be used for? What does the business expect the funding to achieve? Your answers will determine which areas require the most scrutiny.

For example, if you’re a lender assessing a repayment-based facility, you’ll need to pay close attention to cash flow and existing debt. At the same time, an equity investor may place greater weight on market opportunity, growth potential, and the management team's ability to execute.

2. Verify the Business and Its Ownership

Next, confirm that the business exists as presented and establish who owns and controls it. Check the business’s registration details, ownership structure, directors, beneficial owners, operating locations, and relevant licences or permits.

For a Nigerian business, this may include verifying its corporate records with the Corporate Affairs Commission (CAC) and checking the relevant regulator for its industry. Where possible, verify this information against independent records rather than relying solely on information supplied by the business.

This first check can also reveal related companies, ownership changes, regulatory issues, or other information that may affect the rest of the diligence process.

3. Review the Business's Financial Position

Examine the financial information needed to understand how the business has performed and where it stands today.

Review financial statements, management accounts, bank records, tax information, debt obligations, cash flow, and financial projections where relevant. Look for trends rather than relying on a single period's results.

Then test whether the numbers make sense together. If reported revenue has increased significantly, for example, investigate what drove the increase and whether it is supported by sales records, contracts, invoices, or other relevant evidence.

4. Assess the Business Model and Commercial Position

Next, establish how the business makes money and whether that model is sustainable. Review its products or services, target customers, pricing, revenue sources, customer concentration, retention, competitors, and market conditions. Determine whether the business's current performance and future projections are supported by genuine demand. This is where you test whether the company's growth story is backed by evidence rather than assumptions.

5. Assess Operations and Management

Determine whether the business has the people, systems, resources, and processes required to deliver its plans. Review key suppliers, operational dependencies, technology, staffing, management responsibilities, and reliance on individual employees or founders. Consider whether the business could continue operating if a key customer, supplier, employee, or founder were no longer available.

The objective is to establish whether the business can execute the plan that the funding is supposed to support.

6. Investigate Legal, Regulatory and Other Risks

Review the legal and regulatory issues that could materially affect the business or the funding. This may include material contracts, intellectual property, employment obligations, licences, litigation, regulatory compliance, tax liabilities, and existing financing arrangements.

The level of investigation should reflect the business and its industry. A regulated financial services company, for example, requires a different regulatory review from a small professional services business.

7. Verify the Information Provided

Do not treat any information provided by the business as the end of the process. Use it as the starting point for verification. Compare information across different sources and investigate inconsistencies.

For example:

• Revenue reported in financial statements → sales records → invoices or contracts → bank or payment records
• Ownership disclosed by management → corporate records → shareholder information
• Customer growth claimed → customer records → contracts → revenue data

The purpose is to establish whether the important claims made by the business can be independently supported.

8. Identify and Assess Material Risks

Once the evidence has been reviewed, identify the risks that could materially affect the business or the funding. Not every problem should carry the same weight. A minor administrative gap is different from undisclosed debt, unreliable financial records, unclear ownership, or dependence on a single customer for most of the company's revenue.

For each significant risk, determine its potential impact, likelihood, and whether it can be mitigated.

9. Decide Whether and How to Provide the Funding

The final step is to turn the findings into a funding decision.

Depending on the outcome of the diligence, you may decide to approve the funding, approve it with conditions, request additional information, adjust the amount or terms, defer the decision until specific issues are resolved, or decline the request.

The decision should be based on what the evidence establishes about the business, the risks involved, and the specific funding request, rather than the strength of the pitch alone.

Documents to Request During Business Due Diligence

Now that you know what to look for, the next step is to gather the evidence that can help you answer those questions.

The documents you request will depend on the business, the type of funding, and the size of the transaction. You do not need every document listed below for every funding decision. Start with the records most relevant to the risks you need to assess, then request additional information where something needs clarification or verification.

1. Business and Ownership Documents

Request documents that establish the company's legal identity and ownership, such as:

• Certificate of incorporation or business registration
• Constitutional documents
• Current shareholder or ownership records
• Details of directors and beneficial owners
• Relevant business licences and permits
• Organisational structure, where applicable

These documents help verify that the business exists as presented and establish who owns and controls it.

2. Financial Documents

Financial records provide the clearest picture of the business's financial position and performance.

Request:

• Income statements or profit and loss statements
• Balance sheets
• Cash flow statements
• Recent management accounts
• Bank statements
• Accounts receivable and payable reports
• Existing debt or loan schedules
• Financial projections and budgets

For an established business, reviewing several years of financial history can help identify trends. For a newer business, the focus may shift towards available financial history, current performance, cash position, and the assumptions behind its projections.

3. Tax and Compliance Records

Request relevant records that show whether the business is meeting its tax and regulatory obligations. Depending on the business and jurisdiction, these may include:

• Tax returns
• Evidence of tax payments or tax compliance
• Relevant regulatory filings
• Industry licences and permits
• Notices of outstanding tax or regulatory obligations

These records can reveal liabilities that may not be obvious from the company's financial statements alone.

4. Customer and Revenue Records

To verify how the business generates revenue, request evidence such as:

• Major customer contracts
• Sales reports
• Invoices
• Customer or revenue breakdowns
• Recurring revenue reports, where applicable
• Customer concentration data
• Accounts receivable records

These documents can help you determine whether reported revenue is supported by actual customer activity and whether the business depends heavily on a small number of customers.

5. Contracts and Legal Documents

Ask for material agreements that could create obligations, rights, or risks for the business. These may include:

• Major customer and supplier contracts
• Partnership or distribution agreements
• Lease agreements
• Loan and financing agreements
• Shareholder agreements
• Licensing agreements
• Details of current or threatened litigation

Pay particular attention to obligations that could affect the business's cash flow, ownership, operations, or ability to continue trading.

6. Operations and Management Documents

To understand whether the business can execute its plans, request information such as:

• Organisation chart
• Key management profiles
• Details of key employees and roles
• Major supplier information
• Operating or production records
• Technology and infrastructure information, where relevant
• Business continuity plans, where material to the business

The purpose isn't to collect internal paperwork for its own sake. These records should help you assess whether the business has the people, systems, and resources required to deliver its plans.

7. Funding Documents

Finally, request documents that explain the funding request itself. These should include:

• Funding proposal
• Amount requested
• Detailed use-of-funds plan
• Financial projections
• Key assumptions behind the projections
• Proposed repayment or investment structure, where applicable
• Details of existing investors or lenders
• Previous funding received

The funding request should be clear enough for you to trace the proposed path from capital provided to the activity it will finance and the outcome it is expected to produce.

A useful rule when requesting documents

Do not request documents simply because they appear on a standard checklist. Every document should help answer a specific question about the business. The goal is not to build the biggest data room. It is to gather enough reliable evidence to make an informed funding decision.

🔗Also read: The funding lifecycle and what it entails.

How to Verify the Information a Business Provides

Requesting documents is only the first part of due diligence. A business can provide complete financial statements, contracts, ownership records, and projections, but those documents still need to be assessed against reliable evidence. The goal is to cross-check important claims rather than accepting them at face value. Here’s how to do that:

Compare information across documents

Look for the same information across multiple records and check whether the figures and details are consistent.

For example, if a business reports ₦100 million in annual revenue, compare that figure with its sales records, invoices, customer contracts, bank statements, and financial statements where appropriate. If the numbers do not align, ask the business to explain the difference before proceeding.

Verify ownership independently

Do not rely solely on information provided by management about who owns or controls the business. Where possible, check corporate registries, shareholder records, beneficial ownership information, and other official records relevant to the company's jurisdiction. This can help identify discrepancies between the ownership presented to you and the company's official records.

Test financial claims against underlying evidence

Financial statements tell you what the business reports. Supporting records can help establish whether those figures reflect actual activity.

Depending on the business, this could mean comparing:

• Revenue with invoices and customer contracts
• Cash balances with bank statements
• Accounts receivable with outstanding customer invoices
• Debt balances with loan agreements
• Payroll expenses with payroll records
• Tax figures with relevant filings

You do not necessarily need to verify every transaction. Focus on material figures and areas where the information could significantly affect the funding decision.

Verify major customers and contracts

If a business's funding case depends heavily on a few customers or contracts, investigate those claims more closely. Review the relevant contracts and check their:

• Value
• Duration
• Renewal terms
• Payment obligations
• Termination clauses
• Outstanding commitments

Where appropriate and with the necessary permissions, independent customer references can provide another way to validate material commercial claims.

Test the assumptions behind projections

Financial projections are not evidence of future performance. They are estimates based on assumptions. Ask what supports the assumptions behind:

• Revenue growth
• Customer acquisition
• Pricing
• Profit margins
• Operating costs
• Hiring
• Cash requirements

Then compare those assumptions with the business's historical performance and available market evidence. If a business expects revenue to double in the next year, for example, there should be a credible explanation for what will drive that growth.

Investigate inconsistencies instead of ignoring them

A discrepancy does not automatically mean that a business is unreliable. There may be a legitimate explanation. What matters is how the discrepancy is handled.

Ask: What is different? Why is it different? Which information is accurate? Can the explanation be independently supported?

Repeated inconsistencies, missing records, or claims that cannot be verified warrant greater scrutiny because they can affect your assessment of the business's credibility and risk.

Ultimately, effective due diligence means moving from “the business says this is true” to “the available evidence supports this claim.”

Business Due Diligence Red Flags to Watch For

Look out for:

• Financial figures that do not reconcile across documents
• Unexplained revenue spikes or sudden changes in financial performance
• Persistent negative cash flow despite reported profitability
• Significant undisclosed debt or liabilities
• Heavy dependence on one customer, supplier, or source of revenue
• Unclear ownership or discrepancies in shareholder information
• Missing or incomplete financial, legal, or corporate records
• Undisclosed litigation, tax liabilities, or regulatory issues
• Expired or missing business licences and permits
• Intellectual property ownership that cannot be verified
• Financial projections based on unsupported assumptions
• Significant differences between management's claims and available evidence
• Contracts with unusual obligations, termination clauses, or liabilities
• Overdependence on a founder or key employee
• Repeated delays or reluctance to provide requested information
• Information that changes significantly during the diligence process
• Business performance that cannot be independently verified

Make Business Due Diligence Easier

By now, it should be clear that conducting due diligence properly takes more than requesting a few documents and ticking off a checklist. You need to gather information, verify it across different sources, identify inconsistencies, assess risks, and turn all of that information into a confident funding decision.

Done manually, that process can become time-consuming, fragmented, and difficult to manage, especially when you're assessing multiple businesses or working across markets.

That is what Acreed Insights is built to solve.

Acreed helps funders assess businesses with the information they need to understand a company's credibility, bringing the evidence together so you can spend less time piecing information together and more time making informed funding decisions. Be among the first to experience Acreed; join the waitlist.