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How to prove sales during due diligence?

My business tracks sales on a backend database and on Stripe, the mobile payment processor. I'm reluctant to give investors access to either because 1. it might violate the privacy agreement I have with users (my backend has personally identifiable information on users); 2. I don't want others having access to my whole customer base and/or their spending habits. Is this going to be a challenge during due diligence? I'm not sure how much digging to expect.

5 Replies

Joanan Hernandez
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Joanan Hernandez Entrepreneur
CEO & Founder at Mollejuo
Hello,

Maybe you can delay to show the sales figures, but sooner or later the investor will need to see those figures. Is their right as an investor. If you don't trust them, then they shouldn't be your investors/partners.

If you don't want to share this informations (understandably so), then you're not fit to work with investors/partner. Nothing wrong with that, you just need to be aware of it.

Cheers!
Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Due diligence is a process - not unlike buying a house. When you 'pre-qualify' with the mortgage company they accept the information you tell them. When you actually request a loan then the bank asks for 42 lbs. of paperwork. Then they ask for 30 lbs. more. Then 15 lbs. more and they keep asking until you say 'no, that's enough'. Same with DD. Start with high-level information and only drill down further when both parties have agreed that this step is necessary and you get something in return (an agreement that 'if we do this then ___'.) Also be sure to have a very clear understanding of the investor's DD process before you proceed. How do you provide your revenue and expense information to your accountant? Assuming your accountant produces an income statement and balance sheet I would simply provide a copy of these to investors marked as confidential only after you agree that it is necessary. I would start with a simple spreadsheet that shows aggregate revenues and expenses for the years you feel are relevant - make sure you can accurately support this with the income and balance sheet info you will provide later assuming the discussions get that far. If you want to show month over month growth then provide the data in monthly buckets. If for some reason the investor needs additional confirmation then you could, as a last step, allow the investor to view in person (no hard copy) a sample snapshot of transaction data for one month or one quarter or from a few random months from your backend system. This of course would need to tie out to the income statements for those months from the accountant. Explain to the investor(s) your reluctance and the precautions you are taking. They appreciate executives that take appropriate precautions with proprietary information. If you get push back ask them "would you want to invest in a company who's management gives out sensitive/proprietary information without taking necessary precautions"? The DD process should include you qualifying the investors around subjects such as: 1) competitive portfolio companies - if they have invested in your competitors i would be extra cautious about disclosing proprietary info. 2) i would make sure that a letter of intent precedes any DD and this LOI should include some sort of confidentiality clause. I get that investors like to say they don't sign NDAs, but again, DD is a different matter. If they refuse to sign a confidentiality agreement then be extra cautious and at least mark every communication as confidential in writing/email.
Irwin Stein
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
There are people who will do that for you. They are called auditors. If your company's books are audited, then the due diligence regarding your sales is over. Alternatively, your sales translate into deposits in your bank account. Absent an audit many investors will ask to see your bank statements where they can see the deposits that result from the sales that you made. .
Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
i wish it were not the case, but very, very few startups can afford audited financials. very few mature, small businesses can afford audited financials. i get the impression that the OP is referring to his/her startup...
Irwin Stein
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
Mr. Gropper: There are CPAs who will audit a small company for as little as $3500 - $5000 provided that the records aren't kept in a shoe box. If the company has an accountant and tax returns then the latter may suffice. Startup or not this company has revenue that any investor would insist upon verifying. An audit seems preferable to exposing customer data and should satisfy any due diligence process.The company should also hire a good lawyer to negotiate with the investor for them.
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